I certainly don’t have a complete analysis of why this is the case but I can offer a couple of possible reasons. One is that mainstream economics has failed. By mainstream economics I mean the versions of neoclassical theory that students are taught and that serve as the backbone of much of the research that takes place in the leading
graduate programs in economics. Austrian economics shares a celebration of free markets with neoclassical theory but it stands somewhat apart, with a different set of methodologies and concepts. In other words, it’s a different way of making the case for free capitalist markets after the failure of existing—Samuelsonian, for short—approaches to neoclassical economics.
A second reason is that the legitimacy of capitalism is currently being called into question, just as it was during the First Great Depression, when Austrian economics had its first heyday. It was then eclipsed by the Golden Age of capitalism in the postwar period but now it seems to be back with a vengeance. So, not only has mainstream economics failed; capitalism itself has failed. And Austrian economics may just be a last, desperate attempt to argue that the 1 percent—with their obscene riches and tremendous power—have a legitimate place in this society.
I haven’t thought about the question in some time, or updated my opinions, but this was what I tried to begin answering in the paper I meant to present at the ICAPE conference last Fall. Unfortunately, my plane was delayed and then canceled, so I missed my Friday morning session. Nothing was really done with the paper. Not sure anything will become of it. I’m not sure I have more substance to add, but here are a few hastily edited selections.
From the introduction:
During the Spring of 2011 I watched a video of potential Republican presidential candidate Tim Pawlenty. Call it the benefit of diminished expectations, but I was impressed. He seemed somewhat reasonable. He didn’t want to suspend freedom of religion until Saudi Arabia opened a church. There was no attempt at extreme folksyness that made Dan Quayle come off as a stuffy intellectual by comparison. Very reasonable (Relatively speaking). And then he called the currency of United States of America fake. Suspending for the moment our own personal views on what money really is, and whether dollars fit that category, it was astonishing to hear the man I had just considered a likely next president call our money fake. What would I pay my taxes in?
Why wasn’t a claim like this controversial? Maybe it isn’t as sensational as today’s standard controversies involving sexting, death panels, Islamic-fundamentalist communist takeovers, and a first lady who advises you to eat a few vegetables. Another reason is the increased popularity of these Austrian types of ideas concerning money and the economy.
The main goal of this paper is to investigate the causes of the recent popularity of Austrian economics. Perhaps an adherent of Austrian economics would argue that the cause is singular. Austrian economics is correct and now people are realizing it. I do no take this approach for two reasons. First, I am not an Austrian economist. Second, even with respect to beliefs I hold, the adoption and proliferation of an idea is a complicated social process that can not be captured by this simple concept of “correctness.”
In the context of the panel, there are two conclusions I want to stress. Of the many factors shaping the influence of Austrian type ideas, two seem key to me. First, even as a heterodox tradition, Austrian type ideas have long been an important part of the ideological mainstream in the United States. Textbook neoclassical economic is not as ideologically important as some may assume. Second, Austrian economics speaks to the fundamentally moral character of the economy, and the public’s economic concerns.
In short, Austrian economics is popular now because it was already popular (in some sense) and is not ashamed to sound moralistic. What does that imply for other heterodox traditions? In my view, it implies we should be careful about two different strains of left economic critique – (1) the debunking neoclassical economics project and (2) the progressive-technocratic dismissal of economic moralism. My views on the two differ. For the latter, I think that despite a kernel of truth in the claim that “economics is not a morality play,” the technocratic response is inappropriate. For the former, I continue to think that such a critical project is intellectually and ideologically important, and am agnostic about the optimal amount of resources devoted to it, but do think that a serious consideration of that question must begin with the bounded significance of mainstream economics. In other words, this is not the grumpy chastisement heterodox economists to do less direct critique, but a call for attention to the way in which the orthodox model works alongside a number of more heterodox pro-market/pro-capitalist economic representations.
Later in the paper:
…I will not consider whether the adopters of Austrian-type ideas are faithful to any particular thinker or tradition. In the case of deviations, I will not consider whether these are improvements or bastardizations. This being said, out of respect to Austrians who might see bastards where I see children, I will focus on what I call Austrian-type ideas.
Austrian-type ideas are inspired by Austrian economics, or related social philosophical traditions. They may or may not be faithful. Either way, they are more easily linked to Austrian economics than a competing tradition…I break popular Austrian type ideas into five related categories.
Fake money as the root of most evil. Modern money is essentially fake. It is fictitious because it is either (1) not a commodity or (2) not the product of a free private banking system. This fictitiousness – the lack of an anchor to either real things or market logic – is largely responsible for economic problems. Other forms of government intervention share the rest of the blame.
Inflation heterodoxy. Inflation is bad with few qualifications. Economists often think about inflation in terms of its costs and the costs of preventing it. In the popular Austrian view, inflation does not have discrete costs and benefits that can be compared. It undermines the very foundation of the economy. Robert Shiller (1997) has argued, based on surveys, that many non-economists hold a sticky-wage type model where inflation reduces real income. This definitely holds some truth, but I think there is more. At times, this intense anti-inflation perspective borders on the deontological.
In a version of a talk (non-economist) John Nash once gave here at the University of Massachusetts, published in the Southern Economic Journal, the very definition of inflation is presented as sufficient criticism:
As inflation has become more of a standard and expected phenomenon, the CPI has been used and interpreted as the most realistic and practical measure of the actual rate of inflation. When it is at the 2-3\% level, it is currently fashionable for all economic and financial commentators to say that “inflation is not a problem” or “inflation is under control.” This, of course, involves a sort of psychology. Over the current expected human lifetime of 70 years, the value of one unit of currency at the time of a person’s birth would exceed four units of its value at the time of that person’s expiration. (p.8, 2008)
A few things are worth noting. First, this was a talk delivered largely to economists (he had delivered it multiple times to economists prior to the University of Massachusetts talk which had a significant public attendance on account of the film A Beautiful Mind), so this is not Irving Fischer trying to educate the population about basic inflation literacy. Second, there is no attempt to talk about income. The very fact a dollar today is less valuable than a dollar from 1940 condemns inflation. Some commentators think inflation is not a problem, but they must not understand the definition of inflation! Finally, in a concluding note Nash says that in presenting the talk he was introduced to the work of Hayek, whose ideas he finds similar. Nash’s paper doesn’t have the analytical depth of Hayek’s work, but it shares a similar sentiment. In other words, Nash’s talk is an excellent example of a popular Austrianism.
This being said, it would be a mistake to reduce all hostility to inflation in this fashion. Some of it is motivated by the consequences of inflation (as opposed to the very idea of it). This is particularly true for people who have some access to the writings of people like Hayek or von Mises. In this case inflation is bad because it creates distortions in the market, influencing interest rates or relative prices. Nonetheless, this is not a particular cost that can be compared to possible benefits – it is simply bad.
Ambiguous markets. The popular Austrian-type view of markets is ambiguous. On one hand, there is the standard invisible hand type belief in the optimality of free market outcomes. On the other, significant market failures are sometimes assumptions of Austrianish arguments. Take, for example, Ron Paul’s extreme notion of the inflation tax. On the significant costs of inflation he states:
Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy. (p.25, 2009)
In other words, the average non-member of the government or banking cartel is currently making only 5% of the real income they could be making. Nominal incomes are completely independent of inflation over decades. This goes well beyond any wage-stickiness you’d find in an orthodox macroeconomic model. I do not want to mock this logic, but rather point out how incongruous it is with the notion of an efficient market economy. In this world, incomes are absolutely divorced from the value of one’s contributions.
Tyler Cowen has suggested the Austrian view has a “thin skull” view of markets with respect to government intervention. On one hand, markets are wonderful and efficient. On the other, even the slightest nudge from the government can create massive damage. For example, given the existence any government support of the housing market, the entire mortgage-related financial system will become radically inefficient. An Austrian would likely question that government intervention is ever slight, but the key point remains. For a non-Austrian supporter of laissez faire, most interventions produce particular inefficiencies and misallocations, but do not undermine the basic workings of markets. Government support for housing will create a suboptimal amount of houses, assuming no market failures, but won’t lead to irrational bubbles. In the Austrian-type analysis, standard intervention can create disaster.
Libertarianism and Liquidationism. In terms of politics and policy, the Austrian view is libertarian and liquidationist. Other than the protection of property rights, there is no economic role for the state on either deontological or consequentialist grounds. Aggregate demand generating policies might in some cases lead to growth, but this growth is of an ultimately fictitious character, merely postponing and intensifying the day of atonement. Reallocations of capital and labor require facing the full shock of a recession.
Relative ignorance of policy makers. Another distinctive aspect of the Austrian-type laissez faire view is what I call relative ignorance. In orthodox macroeconomics, the critique of interventionist Keynesian policies was premised on the rational expectations of the public. It is fine to accept that economic technocrats are rational and enlightened, except in the respect that they assumed an “irrational” public. The New Classical critique is not that the government is necessarily stupid, but rather that the people are not stupid either. Rational expectations macroeconomics adopted a very particular notion of what “not stupid” implied, but that is not my interest here. The point is that the orthodox critique of Keynesianism is motivated by the rationality of the public. The Austrian-type skepticism of intervention moves in the opposite direction. Economic agents may well be irrational or ignorant in some sense, but the government is even more ignorant. In other words, the Austrian critique of planning is very similar to their critique of intervention in general.
Later, I treat Austrian-type ideas as memes and think about the success of their replication:
With exceptions (Ruccio and Amariglio 2003), we do not think much about the dynamics of popular or everyday economic knowledge. But the successes of Austrian ideas I’m interested in exist largely outside of the academy or its mainstream. We can not understand this phenomena in standard history of thought/science terms. Inspired by the frequency in which I’ve encountered Austrian memes in comments on the internet, I’ll frame this success in terms of meme replication. How does an Austrian idea spread? If we were interested in paradigm shifts or broader epistemic changes, meme replication would be insufficient. Or, at best, it would provide a very methodological individualist account, reducing structural changes to individual units of information (a meme). In this case, structural changes are not my interest. I’m looking at the propagation of discrete Austrian ideas.
Heylighen (1999) breaks the replication of a meme down into four stages – assimilation, retention, expression, and transmission. In short, an idea must become accepted by some agent, persist in their mind, and be expressed to others who assimilate it as well. Heylighen provides a number of criteria that determine the success a meme has passing through each stage. I will frame the discussion of Austrian ideas in terms of these criteria, but not exhaustively. Some criteria are not pertinent. For example, the criteria of “formality” influences the fidelity of replication, a concern I have bracketed.
At the stage of assimilation we will consider three criteria. Successfully assimilated memes tend to be distinctive, simple, and authoritative. A distinctive idea stands out from other ideas. A simple idea can be grasped. An idea tied to figures with authority is trusted. Austrian economics is both distinct and simple. I do not mean to imply it lacks depth or is simplistic, but key Austrian ideas that allow it to be distinguished from other approaches, can be expressed in a direct non-academic fashion. A talented teacher can make the key differences between Keynesians, New Keynesians, and New Classicals clear, but this requires said talent. The defining features of these schools (i.e. assumptions about expectations, determinants of the aggregate supply function, etc.) are internal to specific academic models. Austrian economics is fundamentally different from orthodox economics in important respects. It is easy to distinguish between a view of the economy that says the Federal Reserve should engage in optimal monetary policy, and one that say the Federal Reserve will just mess everything up. The Austrian outright rejection of counter-cyclical policy is more easily distinguished from Keynesianism than the New Classical rational expectations critique.
Despite being a heterodox school, Austrian ideas have enjoyed a certain authority recently. What matters is not whether a speaker should be an authority, but whether they are perceived as authoritative. Ron Paul deserves mention here. Politicians are not the most respected figures in American society. Still, there is a degree of respect people have for Paul. Without getting into the content of his politics, he is an unorthodox politician. One might not agree with anything he says, but he can’t be accused of the typical slipperyness we get from most politicians. He represents causes that are popular in the United States (criticism of foreign intervention and the War on Drugs), but not represented by the vast majority of Democrat or Republican polticians. Another important authority is Peter Schiff. In orthodox economics circles he has little authority, but on the post-crash internet he has plenty. A video compilation of entitled “Peter Schiff was right” has almost 2 million views on Youtube, and multiple similar video exist. The figure of a lone seer, attacked, ridiculed and belittled for his predictions by supposedly serious economic commentators is very powerful. Not only was he “right,” he was right when everyone else appeared (because everyone else who was right was not invited on television) to be wrong, and mocked him for disagreeing. The absurdity of hearing, in retrospect, the likes of Laffer and Ben Stein laughing off concerns about housing and finance, boosts Schiff’s stature. Finally, there is a long tradition of academic Austrian economics, a journal, and Austrian economics professors.
A coherent meme fits with existing ideas. This is not a notion of internal coherence. Coherency aids retention because its fit eases understanding and limits contradictions between long-held beliefs and new ideas. In my view, coherency is very important for the success of Austrian ideas. While heterodox with respect to modern economics, they fit within many popular understandings of markets and economy. For example, the Austrian defense of free markets is very much a matter of the lesser of two evils. It is not that the economy is always in Arrow-Debreu style general equilibrium. A free market economy might be a mess, but that is part of the beauty of it. Furthermore, Austrian concerns about modern money and central banks cohere with long traditions of federalism and ontological anxiety over money in American culture.
Retained memes tend to have utility. Of course, we need to think of usefulness in broad terms. Economic theories are incredibly useful to people during both booms and busts. During booms, people are reassured by explanations of how this will continue forever because of reasons X, Y, and Z. During the boom, expect a boom in media about the boom. During the bust, expect a boom in media about the bust. I often remind my students, who now have fuzzy memories of the early days of the financial crisis, that leading public economic authorities were warning us that the nation might not get their next pay check because of a collapse in the system of payments. Any horrific economic event imaginable, and plenty unimaginable, were likely to occur without a massive bailout costing unimaginable amounts of money and poorly understood institutions. I don’t mean to exaggerate or sensationalize the crisis or its scale, but in general, we have a difficult time grasping the magnitude of the macroeconomy. In a time of (obvious) uncertainty, instability, and potentially severe economic pain, answers are in high demand…Austrian economics provided straightforward and understandable explanations that cohered with many previously held beliefs. Obviously, if Washington just prints a bunch of fake money instead of depending on the Protestant ethics of hardwork and saving we are in trouble!
Austrian ideas were also useful to commentators, intellectuals, and politicians whose standard free market apologia was undermined by the crisis. By shifting from a more orthodox rational expectations view of fully efficient markets to an Austrian defense that accepted uncertainty and imbalances, opinion makers were able to continue defending markets from government intervention despite, or even because of, the crisis. It is taken as a matter of simple fact by some on the left that the financial crisis unambiguously invalidated neoliberal pro-market arguments. But epistemology is hardly simple. There are multiple pro-market worldviews, and not all were so directly invalidated by the crisis. While Fama was out, there was still room for Hayek. The Austrian view of messy markets became very useful because it allowed opponents of government intervention to abandon one set of pro-neoliberal arguments for another, hardly missing a beat.
Finally, in the conclusion:
Another aspect of Austrian economics that has impacted its success is its moral tone. I do not want to make any claims about the scientificity of Austrian economics relative to other traditions. My position is that all economic thought has moral entailments, and most economists tend to make claims of objectivity. The point I want to make is that compared to textbook economics, Austrian-type ideas in the wild tend to have an explicit moral dimension to them. Among the general public, this moral dimension facilitates all stages of the replication process.
What exactly do I mean by this moral dimension? Austrian ideas about business cycles have strong references to notions of “rightness.” There is an implied sense of a natural orderliness where things are just right. Fictitious and alien interventions, undermine and distort this order, creating problems. Attempts to fix these problems through hair of the dog impositions of more disorder are taken as absurd. Why should we support the housing market when the housing market got us into this mess? Why let the government borrow when borrowing got us into this mess? The only true cure is paying dearly for our economic sins.
It is possible to admit that some opponents of housing market support, or fiscal stimulus, do make “causal” or consequentialist arguments for their position, while recognizing that for many, the attractiveness of these arguments is conditioned less by their (theoretical-empirical) plausibility and more by their appeal to deeply held moral beliefs about what is right. The particular economic morality I am referring to assumes that inherently good behavior leads to good or desirable economic outcomes. Morally bad behavior leads to bad or undesirable economic outcomes. It is an equivocation of different types of “good,” and/or, the faith that consequentialist and deontological reasoning should lead us to the same answer.
Austrian ideas appeal to strong notions of what is right, that also happen to conform with previously held beliefs and ideology. I don’t think it is meaningful to rank criteria here, but this morality and conformism (in the specific sense we are using the term here) are the most useful for us to consider. They hold lessons for those of us concerned with heterodox economics more broadly. In particular, I think they suggest caution concerning two types of left-of-center economic discourse – the technocrats and kinked isoquants.
Economics is not a morality play. A number of economic commentators, including many Keynesians, have stressed this point in response to calls for penitent austerity…
…There is an element of truth in this critique. I do not want to argue that the economy is indeed a morality play as the right currently views it. But that is because doing so takes neither morality, economy, or their relationship seriously enough. Because many commentators, economists, and politicians arguing for austerity speak as if the economy is a morality play, it is tempting for someone on the left to attack them for a lack of objectivity or scientificity. Don’t they understand the economy is the proper object of technocrats? Because these proponents of austerity sometimes contradict long-held textbook views of the macroeconomy, it is also tempting to appeal to the orthodoxy.
This progressive-technocratic counter should not be adopted by heterodox economists. It is possible to critique crude reductions of the economy to moralizing stories of industrious and hardworking squirrels, without turning the economy into an amoral, apolitical machine in need of tuning. Not only is the technocratic alternative ultimately impossible, naturalizing a particular set of normative concerns, there is limited public demand for it. Certainly technocratic rhetoric appeals to some (people who self-identify as “wonks” being one group), but a heterodox project that wants to inform the public economic imaginary should embrace the economy as both an ethical and political space.
The popularity of Austrian-type ideas also points to the limited hegemonic importance of neoclassical economics. This should not be a controversial claim. Isn’t it extreme to say the importance of neoclassical economics is limitless? Nonetheless, while we would hesitate to explicitly speak of an unbounded significance, it does seem that heterodox economists do tend to assume a very strong relationship between textbook neoclassical theory and neoliberal policies. The textbook imposes a particular science of policy on politicians. The textbook provides the rational used to legitimize these policies among the people. In both cases, this is an oversimplification. (On topics like drug policy, we could only wish the mainstream economic tradition had such direct and absolute influence.) Policy production is messy and while textbook economics and neoliberal reforms may appear to be soulmates, the actual relationship between the two is complicated and mediated by various other factors. But this is a completely different topic. The point I want to make is that textbook economics plays a relatively small role in legitimizing the market or capitalism among much of the general public.
If I may indulge in a personal story, early on in graduate school I taught an intermediate microeconomics course. We had a small section on game theory, and I spent significant time figuring out how to get them to think critically about Nash equilibria. What happened in class? I spent zero time critiquing the concept because people said they thought it was completely “stupid.” They wanted to know how anyone could take the concept seriously. Fearing that this absolute dismissal followed, in part, from a lack of comprehension, I spent the whole class defending its possible usefulness. Similar dynamics occurred discussing the theory of the consumer, general equilibrium, and so on. The heterodox graduate student in me was shocked. How could relatively mainstream students be more critical of core textbook concepts than many radical graduate students? The non-academic in me was not surprised in the least. Had anyone I met in the first 20 years of my life accepted free market capitalism on strict neoclassical grounds? No.
People are not rational in the orthodox sense of the term. Markets can be messy. Isoquants may not be smooth. Bubbles happen. The future is uncertain. Remember the Cambridge Capital Controversy. These are not necessarily observations that radically undermine everyday conceptions of the economy. This is not a dismissal of such criticisms against neoclassical economics, but a consideration of their use. It would a shame for heterodox economists to not use this period of economic distress to denaturalize the orthodox view of the economy. It would also be a shame to assume the hegemony of neoliberal capitalism rests solely on that question.
 Pawlenty has since dropped out. I was definitely wrong about his chances of success, but his failure was certainly not the result of any economic policy unorthodoxy. I had assumed the Republican party leadership would get serious about squashing the tea party influence well before they were left with Cain-Perry-Romney.