TCS Daily

The Sect of Austrian Economics

By Arnold Kling - November 11, 2003 12:00 AM

"[Sociologist Ernst] Troeltsch distinguished between church, sect, and mysticism as primary types of religious life. The church is more peremptorily inclusive and achieves greater accommodation to worldly institutions. The sect demands voluntary commitment from its members, is more perfectionistic in its aims, and often adopts a critical stance toward existing social arrangements..."
-- Donald A. Nielsen


I recently took the long form of the Are You an Austrian? quiz, which is about whether I agree with economists like Ludwig von Mises and Friedrich Hayek, not about whether I have the same country of origin as the new governor of California. I scored a 78.


I would have scored higher had I been trying to answer according to what I understand the Austrian School to believe. There were only one or two questions where I was a little unsure, and depending on how well I guessed on those I would have gotten somewhere between 90 and 100.


The reason that I only scored a 78 is that I took the title of the quiz literally ("are you an Austrian"), so I answered with my own beliefs, knowing that they diverged in some cases with the Austrian School. For example, I subscribe to the quaint notion of national defense. When tyrants and would-be tyrants ask about our President, as Stalin once asked Churchill about the Pope, "How many divisions does he have?" I would like the answer to be "more than enough to smash you!" The Austrian School thinks that you do not need a government to provide national defense. The weblog is as eager as any Dean Democrat to see the U.S. fail in Iraq.


I found it interesting that the "Are you an Austrian?" quiz does not distinguish between knowledge of doctrine and belief in doctrine. To me, this is symptomatic of a sect, which focuses on doctrinal purity above all else. For a sect, to know is to believe, and to believe is to know.


A church, in contrast, tries to be as inclusive as possible. You can be a member of a church if you only subscribe to some of its beliefs, but not all of them.


The Features of Austrianism


The Austrian School offers a perspective on property rights, markets, and economic growth which I find highly congenial. It emphasizes the incomplete information that any individual or organization has. It says that private ownership of property and free markets allow the sort of trial and error to take place that enables learning and economic growth. As businesses compete, efficient technologies survive and inefficient processes fall away.


This introduction by the economist Deborah Walker traces the origins of Austrian economics to 1871, and points out that the major works of Mises and Hayek were written from the 1920's to the 1940's. However, in today's information age, if the Austrian school did not exist it would have been invented. With our economy dominated by competitive innovation, in computers and consumer electronics, biotechnology and medicine, and other fields, the impossibility of central planning seems evident. Today, John Kenneth Galbraith's claim in his 1967 masterwork New Industrial State that "The modern large corporation and the modern apparatus of socialist planning are variant accommodations to the same need" sounds as though it could be the beginning of an indictment of large corporate dinosaurs, with an inability to tolerate decentralized innovation. For Galbraith, of course, it meant the opposite -- he was arguing for the inevitability of the convergence of socialism and capitalism.


Much of what I believe about economics is based on the concept of imperfect knowledge. Imperfect knowledge implies that as we gain knowledge, our standard of living improves. However, we still have much to learn. We know how to treat strep throat, but we do not have a cure for cancer.


As a process for learning, free markets and private property are extremely valuable. The market system provides an incentive to experiment and to adopt successful experiments. To me, this core insight is the key contribution of Austrian economics.


The Bugs of Austrianism


Given that Austrian economics focuses on The Knowledge Problem and Competition as a Discovery Procedure, which of the following would you guess would be a metaphor for an Austrian explanation of booms and busts in business investment?


(A) Imagine a restaurant in which the menu includes some items that can be cooked quickly, using stir-fry and microwave techniques, while other dishes such as stews and roasts require longer and more roundabout cooking methods. In a well-functioning restaurant, the extent to which consumers are hungry now or are willing to wait determines the mix of food that is prepared. The waiters deliver the right information to the chefs about how much of each type of meal to prepare. However, like a bad waiter, a central bank can enter the picture and deceive the chefs into thinking that people want more stews and roasts than they truly desire. This leads to a boom in long-term cooking, followed by a bust later on.


(B) Imagine a restaurant in which the chefs have many new recipes to try. Most of them will not be popular, but some will represent successful gastronomic progress. When the chefs become optimistic, they try many new recipes, which means a boom. When the chefs become risk-averse, there is a slump.


For reasons that baffle me, the Austrians prefer explanation (A). Explanation (B) is closer in spirit to Keynes, the arch-enemy of the Austrians.


My experience both in business and in economics leads me to prefer (B). I have never been in a business situation where a decision boiled down to a choice between two projects with known, predictable rates of return, with one project short-term and the other project long-term. Instead, the typical challenge has been to guess whether a new business idea will be successful or not, given uncertainties about feasibility, marketing, technology risk, and other factors.


As an economist, I believe that there are many competing explanations for booms and busts in business investment. There are too few real data points to provide conclusive evidence for one of these hypotheses. However, I saw the Internet Bubble developing, I predicted its demise, and I predicted its economic consequences, all without ever thinking of the problem as excess liquidity supplied by the Federal Reserve for which the Austrians blame the bubble. Today, the Austrians believe that monetary policy has been too expansionary and that another crash is imminent. Instead, I believe that monetary policy could have been more expansionary, and a vibrant economic recovery is under way. Time will tell.


Will Austrianism Survive?


The future of Austrianism is uncertain. As a sect, insisting on adherence to all of its beliefs, the Austrian school will remain a committed but eccentric group.


The real need today is for an Austrianism that is more like a church. This would be a movement of economists that shares many beliefs but differs on others. I believe that information-age economics with many Austrian features will emerge. I am not sure whether today's Austrian sect will be pleased or put off by that result.


TCS Daily Archives