19 Austrian
MMT and Austrian economics are mirror images. MMT wants soft money to redistribute wealth to middle class. Austrians want hard money to maintain value of middle class savings. Dominant capitals, in control of state, ignore both and switch between soft and hard to maintain power. (Ian Wright)
19.1 Where Austrians got it wrong
On Colin Drumm https://twitter.com/drumm_colin/status/1468779685916012546
Thread Reader https://threadreaderapp.com/thread/1441459276506021890.html
Ethan Buchman 24 Sep, 24 tweets, 5 min read
Allow me to attempt a more nuanced story of where the Austrians actually did go “wrong” and how they wound up so vilified. I’m still learning the history and formulating my thoughts, but here’s a humble attempt:
1/ A good deal of original Austrian thought was incorporated into the mainstream. Though it had Austrian origins, it became no longer “Austrian” in spirit. The ideas were so good, they had to be appropriated.
2/ This included, of course, marginal utility theory itself (from Menger) as well as ideas like opportunity cost. And Bohm-Bawerk’s capital theory of interest rates (inter-temporal coordination) was taken up by Wicksell who in turn had a heavy influence on Keynes
3/ Mises and Hayek were also heavily influenced by Wicksell, expounding what would become known as the Austrian Business Cycle Theory (ABCT), the foundation for their opposition to govt monopoly on money
4/ Roughly speaking, this is where the Austrians went astray - in obsessing over money as a neutral, non-political veil over real exchange and production, they were largely in denial of actual history, important parts of theory, and even the real world itself!
5/ Neglect of history is partially due to the earlier war with the German Historical School, the so-called Methodenstreit. The Austrians were hell bent on a Praxeology/“Methodological Individualism” which afforded little role for historical circumstance in economic analysis
6/ This is probably the largest error they made. I’m sure the Methodenstreit was a good time, but the inability to incorporate the historical/anthropological record greatly weakened their ability to theorize. They began from an assumption that prior man was similar to modern man
7/ But this is manifestly not true. Cognition and social structures change markedly over time, and this has significant impact on economic reality and coordination. Two very interesting related points here:
8/ First, Weber, who was actually a member of the Historical School, had a major impact on defining Methodological Individualism, and had a huge influence on Mises!
9/ Second, Schumpeter, who would perhaps be the greatest economist produced out of the Austrian tradition (him and Mises were students together of Bohm-Bawerk) actually defected towards the Historical School. Arguably this enabled him to break free from …
10/ Austrian constraints and develop a more complete theory and history of economics. Notably, his student Hyman Minsky, would get all the credit post 2008 for theories about the inherent instability of credit money, to the chagrin of Austrians everywhere.
11/ But Minsky’s Financial Instability Hypothesis wasn’t the ABCT. It was grounded in analysis of the actual web of liabilities produced by a financial system. While the Austrians wrote it all off as “bad”, Minsky sat down to analyze it and provide some constructive policy!
12/ Part of the failure of the Austrian imagination was to provide some meaningful alternative to abolishing fractional reserve banking in favour of pure commodity money. There are some inklings of the power of trade credit clearing in Mises’ TOMC, but it seemed to stop there
13/ Of course Hayek would eventually propose denationalized fiat, and a later tradition of Austrian inspired economists like (GeorgeSelgin?) and (lawrencehwhite1?) would bring this home through a theory and history of free banking - a stable fractional reserve based system
14/ Not to say Austrians were “wrong”, but there was an inherent sort of “arrested development” in their ideas. To continue the history, despite their brilliance, the Austrians took a beating in the 30s when Hayek tragically “lost” the debate to Keynes:
15/ After the second war, they turned their attention more to politics. Hayek of course founded an information theoretic approach to econ (prices as decentralized network of computation) which would have enormous influence. But increasingly “Austrian” would be less associated
16/ with the brilliant economic work of earlier years (so much of which was appropriated in the mainstream) and increasingly associated with a kind of “reactionary” and seemingly “far right” political philosophy
17/ In my own estimation this is at least a mischaracterization of Hayek’s agenda, though I can’t help but agree that his work suffered from a kind of arrested development. And the founding of the Mont Pelerin Society did not help much.
18/ The Austrian tradition had something of a boom in the 80s when it was vehemently taken up by Reagan and Thatcher, but in a way that was highly discretionary/selective. The existence of their large governments and their alliance with the banker class betrayed the essence of
19/ the Austrian teachings! It’s no wonder this would give rise to an abominable neoliberalism which I can only imagine caused more than a few of the Austrian greats to roll in their grave. Personally, I can’t help but feel there was a certain naiveté
20/ in their political philosophy, perhaps a result of their dismissal of the historical school and denial of the role of State, which ultimately led to their philosophy becoming a weapon of what were perhaps some of the most destructive “peacetime” regimes the West has seen
21/ Of course the Rothbardians would take the political philosophy much farther, and would lead to something of a “split” within the Austrians, seeing Hayek as somehow lesser for affording a greater role for the state and realizing that money need not be based on real commodities
22/ But obviously Hayek was on the right track, distracted though he may have been by the political climate. Arguably, his line of thought matured quite substantially in both the Free Banking school and in the Bloomington School of the Ostroms.
23/ And this is where many of us (in crypto, say) are picking up today. Recognizing the foundational brilliance of the Austrians but seeking to not make the same neoliberal mistakes by instead following the Austrians to their conclusion in the work of the Ostroms: local commons!
19.2 Austrian Fascism
Tooze
In 1930 when President Hoover began his last-ditch effort to rebuild the internaitonal order, starting with the London conference on naval arms control, fascist Italy, after Ramsay MacDonald’s Labour government in Britain, was Washington’s favored partner in Europe. When Mussolini’s foreign minister, the charismatic ex-squadistra Dino Grandi, met Hoover in 1931, the president is said to have assured his Italian guest that the vocal minority of antifascists in America should be ignored: “They do not exist for us Americans, and neither should they exist for you.”
Mussolini’s regime, in other words, was not per se an alien force, an “other” that was rejected from the existing international order. On the contrary it was understood, especially, in the 1920s as a force of order, offering a new set of solutions to the problem of capitalist governance and one which forward-thinking liberals and conservatives associated themselves.
And this opens a further disconcerting historical vista. In his elegant study Globalists Quinn Slobodian showed how the Austrian school of neoliberalism emerged after 1918 from the collapse of the Habsburg Empire. It promised to find a way of encasing the economy so that it would be immune to the unleashed politics of national democracy. It would have huge ramifications decades later because of the influence of the Austrian school on Mont Pelerin and the worldwide market revolution. What Mattei shows us, is that a view of economics as having key role in disciplining both state and society went far beyond the confines of the Austrian tradition. It was a basic element in the vision of (new) liberalism from World War I onwards and its influence extended well beyond the diminished crisis-ridden rump of the Habsburg Empire. What motivated it and formed the bridge to the fascists was its desire to restore control - if necessary by repressive means - over government finances, inflation, the workplace and the labour market. The risk otherwise was not Stalinist communism - that was still a far off threat - but a descent into anarchy of the type they saw being played out in civil war Russia.
[Tooze (2022) The centenary of Mussolini’s “March on Rome” and the dilemmas of the liberal expert class. ](https://adamtooze.substack.com/p/chartbook-166-19222022-the-centenary]
Archipelago Capitalism
Quinn Slobodian’s illuminating discussion in Globalists of the relationship between neoliberal economics and the crisis of Empire. He traces the emergence of the original Austrian branch of neoliberalism and the founding of the Mont Pelerin society to the collapse of the Habsburg Empire in the aftermath of World War I. As he argues, Austrian economists of the 1920s saw the democratic nation-state as a threat to the free flow of resources that had been previously secured by Imperial power. A new political economy was required to encase the economy and insulate it from democratic national sovereignty.
As I show in the Foreign Policy piece, it is a logic that can be extended in interesting ways to the way in which offshore finance has found a home in the remnants of the British empire in the Caribbean.
In The Code of Capital Katherina Pistor showed us how the English common law functions as one of the key systems worldwide for the encoding of capital. Much of the Caribbean and the wider region including, of course, the United States has inherited the English common law from the original moment of settler colonialism when the region was joined in an interconnected system of plantation slavery and long-range commerce.
The world of nation state economic policy, “(t)he New Deal, the European welfare state, decolonization, development and modernization projects in the Third World, and the Bretton Woods system” all of which were centered on nation-state-based and government-driven projects. The offshore world by contrast offered enclaves, special economic zones, havens, relaxed regulations and minimal oversight, flags of convenience, anonymous financial and banking institutions.
19.3 Roundaboutness
Thornton
Economists understand very little about how technological progress occurs. —Alan Greenspan
Before we leave the topic of the problems and blessings of roundaboutness of production and the structure of production, it will be very useful to see a natural, concrete example of it in action. It then will become easier to understand the unnatural cases involving malinvestments and the skyscraper curse.
Making production processes more roundabout results in greater production in terms of the quantity produced and a lower cost on a per-unit basis. Entrepreneurs would not want to make production processes more roundabout unless they thought they would create more profits as a result. More roundabout production takes more time, more steps, and a more extensive division of labor. It also uses new technology.
Entrepreneurs do make mistakes, of course, but the only systematic errors they make are when they are fooled into rearranging production because of artificially low interest rates and easy credit conditions. When the central bank lowers its target interest rates it also makes credit conditions easier in that banks will make a larger volume of loans, which means they weaken their lending standards in order to facilitate the larger volume of loans.
A good example of a very direct production process, in contrast to a more roundabout one, is a farmer who goes to the barn, milks a cow, and then returns to the house and feeds the milk to his family.
An example of a more roundabout, although still very direct, production process comes from my childhood. We lived on the edge of a small town. Just beyond our house were fields and barns. Dairy cattle would feed on the grass in the fields. Later they would return to the barns to be milked. The milk would then be transported a short distance — a couple miles — in a small tanker truck to one of three small dairies in my hometown. There the milk would be processed and packaged. Early the next morning a dairy man in a white suit would arrive at our house and place several quart-sized glass bottles of milk in an insulated dairy box outside of our back door and pick up any used bottles we had placed there. If we wanted an ice cream sundae, we had to go to the dairy during retail hours.
By the time I graduated from high school the entire system had changed. The small dairy farms had been largely replaced with larger farms. The small four-wheel tanker trucks had been replaced by large eighteen-wheel tankers. An eighteen-wheel tanker truck brought the raw milk from the farms to the dairy factory about thirty miles from our house, and a different eighteen-wheel refrigerated truck brought cartons of milk and ice cream as well as boxes of butter to the supermarket. All three of the small hometown dairies eventually went out of business. They were replaced by much larger, factory-sized dairies many miles from our home. Instead of having the milk bottles delivered directly to our house, we now purchased dairy products at the local supermarket, an institution that was also a relatively new phenomenon.
The dairy factory system is a much more roundabout production process. It takes more time. The milk travels a round-trip journey of more than sixty miles instead of the less-than-four-mile journey in the old days. There is a greater amount of capital as well as advanced technology involved and there is also far less labor per unit of milk. The overall cost of milk is lower, and with competition between large dairy wholesalers and supermarkets, so is the price.
In order to attain a more roundabout production process there are several requirements. It requires entrepreneurs with a vision of the most profitable action among all possible actions. It requires investment in more capital goods and new technology. Of course, all of this rearranging of production is going to take a great deal of time and even more time for it to be profitable.
Therefore, the entrepreneurs need to have access to savings. They need to have either their own savings or someone else’s savings on a long-term basis in order to proceed. Hence there must be more overall savings in an economy in order to achieve more roundabout production and all the benefits it entails. Savers must have lower time preferences and be willing to delay some consumption in the present. Savers will be rewarded with interest income, with which they will be able to make a larger amount of purchases in the future and at lower prices because of the increase in production of goods. The whole process is regulated by the rate of interest, the price system, and the system of profit and loss.
This process is sometimes referred to as creating economies of scale. But notice that while there are economies of scale in this example, everything about the production process changed. The most successful approach was not preordained or known in times past. The entire recipe or technology of production has changed. All the capital goods — including the milking machines, the trucks, and the machinery inside the dairies — are different. Notice further that the change in the dairy industry is going to induce changes in other industries, including technology and investment in the mechanical milking machines industry. All of this requires a careful synchronization process, which is obviously beyond the scope of central planning. The process is driven by the rate of interest. So we will now see what happens when the interest rate is misleading and results in an economic bust and, in severe cases, the skyscraper curse.
Thornton (2017) Why Understanding “Roundaboutness” Is so Important