Austrian Keynesianism

Economics Economics Questions
1

The fundamental split between the Austrian school (and some neo-classical allies) with the remainder of economic thought seems to be the assertion that government intervention in the economy is everywhere and in all cases undesirable. This is curious, so long as the method is taken to be primal over the conclusion, as it is a tenant of praxeology to be value neutral - i.e., analysis identifies consequences of a policy but does not form value judgements about them. In this case, Austrian methods cannot self-consistently conclude that government intervention is undesirable, only that intervention produces particular results, to which is added the separate judgement that these results are undesirable.

To examine these results, consider the microeconomic perspective of individual rational actors (which as I understand is a prefered approach in the Austrian school.) On the one hand, there is an individual whose investments yield interest that exceeds a subsistence income. His desire is to maximize the ratio of his interest gains to the prices of the goods he wishes to buy. Whether one subscribes to the Austrian view that the price of the good determines the price of the factors of production, or the contrary mainstream view, his desire to minimize price necessarily entails a desire to minimize wages paid during production. This brings us to the second individual, who does not have significant investments or savings. His desire is to maximize the ratio of his wage to the prices of the goods he wishes to buy- that is, to minimize non-wage factors of production, including interest.

On the face of it, these two desires are very much at odds. Austrian and (neo)classical views include the axioms that, first, the economy tends towards an equilibrium (or what Mises might have termed a strange attractor had he been familiar with later work in chaos theory), and second, that the equilibrium is optimal. However, in light of the two competing actors, it must be asked “optimal for whom?” There can be but one current state of the economy, so if there are alternative optima, government intervention to select the optimum is in principle legitimized.

Various arguments may be proposed that the two actors’ concerns are actually in alignment, such that there is no alternative optimum. The Austrian position on intervention is that it would worsen the situation for all actors, so let us proceed with that and consider how our two actors’ interests might be aligned. The two definitions of benefit were the ratio of interest to price and the ratio of wages to price, so equivalence between them requires that movements in equilibrated interest rates and wages are precisely proportional. Because wage is a factor of price (or price is a factor of wage), mere positive correlation between wages and interest is not enough to eliminate alternative optima. The consequences of this proportionality are negative feedback loops when attempting to manipulate variables, which is consistent with the axiom of a single optimum, but problematic for the Austrian explanation of growth as a natural consequence of free exchange.

As the Austrian model tends to resist disequilibration, what then are the independent variables driving growth? (As growth is a form of disequilibrium.)

James Morgan Qualls

2

“Austrian methods cannot self-consistently conclude that government intervention is undesirable, only that intervention produces particular results”

I’m not really qualified to answer this but I’d offer a sideways comment, so to speak.

Let’s say the there is a drought, the supply of wheat drops, the demand is the same, it means the price goes up. Many people cannot afford it eat less than they used to. The high price incentives everybody to reduce their consumption therefore there is a higher chance that everybody will be left at least something to eat. In the longer run, the high price incentives people to invest into wheat production, driving the supply up thus the prices down.

Now let’s say a goverment creates a prices ceiling. This increases demand and decreases supply (future supply, compared to what it would be without it). But the original problem was exactly higher demand than supply.

So if an intervention tries to solve a problem and ends up increasing the very same problem, cannot we objectively say it’s a wrong idea?

3

To the OP, have you read either Block’s, Mises’ or Rothbard’s articles on value-freedom? Mises explicitly states that if from the point of view of its proponents a policy fails to yield the results desired, that it can be labeled a failure, and so it is with intervention; of course, Rothbard argues that some proponents may in fact desire the negative results for whatever reasons. But Mises’ argument is sufficient IMO to justify the Austrian practice of viewing interventionism as pernicious.

BTW, I’m not sure where Keynesianism fits in in any of this, so could you elucidate?

4

Defining success or failure is a value judgement, as illustrated by the oxymoron of “desiring negative results.” I’ve raised the issue that if two actors desire different macroeconomic conditions, the single situation resulting from laissez-faire equilibrium cannot satisfy them both, and consequently intervention must be subjectively good for at least one of them. In such a case, even Austrian methods would recommend Keynesian policies. The only way this cannot occur is if it is structurally impossible for actors to (rationally) desire different macroeconomic conditions. I’ve presented a scenario in which first appearances lead two actors to desire different conditions, but have also identified the constraint under which they would desire the same conditions (precise proportionality in the deltas of wages and interest rates.) That constraint precludes the Austrian explication of the process of growth as I understand it, but the causes of growth are an area of the Austrian school on which I am particularly under-informed.

5

But as I explained, the economist is speaking purely in terms of the goals of the proponents of the policy. He/she is not slipping in normative terms of his/her own. Given that most proponents of interventionism believe it’ll result in prosperity as opposed to destitution, it is legitimate to judge the policy to be a failure if it cannot deliver the goods, so to speak. Either way, you’re not being imaginative enough; suppose someone desired the collapse of the capitalist system. In that case they may well support policies that are catastrophic if followed through, but which from their point of view hasten the road to their desired end.

Thanks for the clarification. I’m not too informed on the finer points of Austrian theory so I will leave that for someone with more knowledge than myself to answer.

6

Government action in the economy, as defined by all schools, is unilateral reallocation of property titles. Now, by definition, this is undesirable for the person losing property titles, as this is what justifies the unilateralism of the government’s action.

7

This sounds somewhat peculiar to me.

The investor who hires the worker considers the price paid for those wages to be less than the benefit he will gain from the labour provided and also superior to the alternative benefit that he could have obtained by investing the capital in anything else (such as immediate consumption, for example).

The worker who accepts the wages offered to him by the investor considers the agreed wage superior to what he would obtain elsewhere in the market place and so from the worker’s point of view, he has in fact maximized his wages simply by accepting the wage agreed upon with the investor.

So how are these two actor’s goals at odds? In view of the fact that they’ve both willingly agreed to collaborate it’s rather difficult to imagine that they could be.

The only reason you’d need to get the government involved in any of this is if either the investor wanted to pay the worker less than the worker would agree to without a gun to his head or if the worker wanted to extort something from the investor that, similarly, he would otherwise be unwilling to part with should the gun be removed from his head. Government is incapable of knowing either what the investor or the worker value and the only possible contribution it can make will be a violent one. Certainly either the worker or the investor could profit from government intervention, but it’s rather difficult to imagine both of them doing so.

Exactly what is the argument supposed to be here - that what the worker “values” should be considered paramount to what the investor values (or vice versa)? Why should we establish a central government to grant special favour to any subset of the population - workers or investors - I don’t see justification for either personally.

8

The price of the goods and the price of the factors of productions are independent which would explain how something could be sold at either a profit or a loss and/or bid away for a more highly valued good.

Now Rothbard uses this as a basis to explain how the factors of production are priced in an Evenly Rotating Economy but states (somewhere) that this is just a tool like the Robinson Crusoe model and (in MES) “Certainly at this stage of inquiry we are not interested in ethical evaluations of our knowledge. We are attaching no ethical merit to the equilibrium position. It is a concept for scientific explanation of human activity.”

As to the Austrian view of the equilibrium position being optimal, also from MES;

We must always remember, however, that while a final equi­librium is the goal toward which the economy is moving at any particular time, changes in the data alter this position and there­fore shift the direction of movement. Therefore, there is nothing in a dynamic world that is ethically better about a final equilib­rium position. As a matter of fact, since wants are unsatisfied (otherwise there would be no action), such a position of no change would be most unfortunate, since it would imply that no further want-satisfaction would be possible. Furthermore, we must re­member that a final equilibrium situation tends to be, though it can never actually be, the result of market activity, and not the condition of such activity. Far too many writers, for example, discerning that in the evenly rotating economy entrepreneurial profits and losses would all be zero, have somehow concluded that this must be the condition for any legitimate activity on the mar­ket. There could hardly be a greater misconception of the market or a greater abuse of the equilibrium concept.

Human action? Entrepreneurial activity? People’s desire to improve their lot in life?

----edit----

deleted part because I misunderstood the OP

9

Jimmy and AC gave good responses. In addition, in competitive markets all factors will tend to earn their marginal revenue product, and that is as “optimal” as it can get for both parties. Entrepreneurial activity is what helps move the market towards equilibrium. So I am not sure why one should view either investors or workers at odds, given as Jimmy said they’re engaging in a mutually beneficial relationship.

10

As Anonymous Coward noted, the equilibrium is not really an equilibrium but an “evenly rotating economy” which as far as I can tell was Mises’ independent derivation of the notion of a strange attractor. What you describe is one attractor where the worker has maximized wages given the state of the other variables in the system. The worker could still desire higher wages and prevail upon the government to manipulate affairs to a new attractor, as could the investor. For example, the government could buy large quantities of the product, benefiting both the worker and the investor at the expense of other tax-payers. You might object that it would be unjust, but not using value-neutral economic arguments. The policy works for those who designed it.

Such a policy might also be just and desirable to the other tax-payers if it benefits them through economic growth. As for growth, I agree that it results from entrepreneurial action, but Huelsmann has a problem with that notion (http://mises.org/journals/qjae/pdf/qjae2_2_5.pdf) precisely because the government is capable of facilitating entrepreneurship - with the entirely unstated implication that the government must be bad. I say Huelsmann need not be afraid of endorsing entrepreneurship, because government encouragement in that sphere does not suffer the same criticisms as countercyclical policy. The Austrian response to recession is that it must run its course (i.e., to the attractor) and intervention only delays the correction (i.e., sets the variables to a point more distant from the attractor but still within the same sink.) Growth however is not, in my view, the process of approaching the attractor but of moving to a new sink.

Thus, government action that creates opportunities for entrepreneurship (such as the creation of the global positioning system) is qualitatively different from action that merely reallocates wealth to stimulate demand (such as New Deal physical labor projects).

11

Ignoring that fact that taxation is theft, any money robbed from the private sector for government-research is money that can’t be spent on research for products people voluntarily support.

12

Here’s a suggestion: if you want to sponsor entrepreneurship with other people’s money, get them to donate it to you. Interpersonal utility comparisons are impossible, and there is no accounting for all the distortions the government causes by forcefully taking money that’d otherwise not be surrendered voluntarily. If those who the money was taken from will benefit from this scheme more than they would by keeping the money, why would they not finance it voluntarily? Moreover, why is the conclusion that the government must take it by force? Why not just convince them of it if it is true?

13

Not really. I’m sure there were individual New Deal projects that had a benefit to entrepreneurship. But just like any government activity, that one hit rarely offsets the cost of all the preceding misses. Even the GPS system wasn’t designed to facilitate entrepreneurship, but to serve military purposes, which would make it an accidental hit.

14

There’s plenty of opportunities for entrepreneurship created by government action: doing income tax returns, or the radio industry as regulated by the FCC, or, if they create carbon taxes, then the middlemen who would facilitate the buying and selling of carbon taxes between companies. In other words, entrepreneurs can find lots of opportunities to help people deal with government intervention and regulations.

However, none of this means that such government action hasn’t precluded better uses of entreprenurial activity–like anything else, it has simply been misdirected, and thus is a form of malinvestment.

15

I think you’ve expanded the argument to include yet another third party simply to find yet someone else to foot the bill. But whatever arguments can be applied to the relationship between the worker and the investor also apply more broadly to the relationshipt between these two parties combined and another third party, and by extrapolation to all people in society (when considered as a whole). Although the government can intervene in the mutually beneficial agreements that our worker/investor enter into in a free market such that these agreements benefit either the worker or the investor more than without the government’s intervention, it cannot do so in such a way as to benefit both the worker and the investor. The example you try to give of a situation in which it can simply lumps worker and investor together into one group and then chooses yet another hapless victim subgroup elsewhere in society to foot the billl. No matter what government does though, and for who’s benefit, you can guarantee that it is acting on behalf of one group at the expense of another - never at it’s own expense.

Now, the debate, as usual (this is an eternal debate) is to what extent and in what ways should government intervene. The idea that government should be used to benefit McDonalds restaurant owners and workers by buying 5 billion hamburgers a year I think you’d find would be rather poorly received by anyone who doesn’t work for a McDonalds (or own one). The idea that the government might make “rich companies” foot the tax bill for “health and education” is usually much better received by everyone except those who own companies. Since people who own companies are always in the minority and the people who want “free” health and education (i.e. paid for by somebody else) can command a majority in parliament and thus commandeer the use of all the tanks, guns and police for their cause results inevitably in laws that promote free health and education in the socialist countries of Europe.

None of this, you will note, has anything to do with value stained judgements - all of what I’ve said so far has been value neutral - all actors concerned have been acting “economically” to try to maximize their own benefits. We simply have a power game on our hands and the trump card is, as always, violence (the picture on the face of that card is government).

However, it is preposterous to suggest that all government policies in effect today have been conducted for the overall benefit of the people however. And indeed, I’d argue it’s rather debatable that any of them have been conducted for the overall benefit of the people. Reading through my first paragraph you can see that in any situation the government can at best make someone else pay the costs of the benefits someone receives… it cannot create any mutually beneficial relationships that the free market could not (for why would you need to force two people to agree - if they agreed in the first place you wouldn’t need to resort to the use of force). You can always lump variously seemingly opposed parties into a group and create yet a third group to do all the paying, but any way you look at it the net result will be one in which governments actions do not create any net benefit. Every benefit they create is balanced by a cost (usually not to the person receiving the benefit, so sometimes obscurred but most certainly always present). Thereforce, from a macro perspective, at best government action can break even in terms of it’s affects on any two parties (and by extrapolation it’s affects on society as a whole). However government action comes at the cost of it’s intervention. Therefore, the total cost (when all players in the system are taken into account) of acheiving anything with government will always exceed the cost of doing so without government.

Furthermore, government could actually, through it’s own stupidity, increase the costs to all parties involved (e.g. price floors). So in some circumstances you have a lose-lose scenario with a little bit of government overhead as the absolute looser cherry on the whole fricking looser cake.

16

Not what I said at all.

What I did say that the ERE was used to demonstrate underlying economic principles and is not the ‘Austrian model’ nor is equilibrium theory.

You overlook the hidden costs of such a government policy.

I would suggest you look into the Broken Window Fallacy;

That pretty much answers your whole argument for government intervention in the economy I would imagine. Sorry it took so long but your original post wasn’t quite clear on exactly what you were asking.

17

In addition, there is the question of government failure. The Austrians recognize this via the calculation and other related arguments, whereas the Public Choice school recognizes it more explicitly as the failure of government to achieve its goals and/or avoid undesirable side-effects. New classicists have introduced the notion of time-consistency, whereby a policy is no longer worthwhile pursuing if at some time after the government has instituted it it no longer proves to be optimal - and new classicists argue government is structurally constituted so as to lead to time-inconsistent policies. These are all differing aspects of the same argument.