MSE 299: Class Audio
Go through these posts from the bottom and work your way up.Week1, Class 1, 01/06/2009
Scott Olmsted's email (read this before reading the article above):
Friends,
I have been asked by several of you what this "Austrian economics" thing is. While this article is
not an explanation of the Austrian school of economics (Austria being where the ideas
originated), it contains one idea that is central to the Austrian school: there is no logical
distinction between "microeconomics" (the actions of individuals and firms) and
"macroeconomics" (the entire economy).
All other schools of economics bring in new, simplified concepts and tools to analyze
macroeconomics, where the Austrian school does not. The macro-economy IS the aggregate of
the micro-economies of its actors, and the Austrian school is the only school of economics that
acknowledges this. All others resort to simplified and mechanical models of flows of money and
this lead to bad policy recommendations.
In particular, the Keynesian school of economics regards consumption as the "engine" that pulls
the rest of the economy. While there is a germ of truth here, many other important economic
concepts, such as an understanding of savings, capital, and investment, are just thrown out the
window. But this school of economics has been so influential, virtually everything you hear in
the media reflects it.
Based on this fallacious and illogical (but popular!) theory, the Keynesians want to spend us into
prosperity again. For example, Alice Rivlin, the old Keynsian former director of the
Congressional Budget-Busting Office, was recently on the PBS "Newshour" during a panel
discussion on the economy. Her advice for ending the depression: Spend every cent of your
money on . . . whatever. "It doesn't matter what you spend it on," she said.
This is the point of Peter Schiff's article below. It won't work. It will just make the country
poorer, especially when inflation kicks in and prices skyrocket. Alice Rivlin has it backward:
instead of all us imitating the government spending money it doesn't have, it should imitate us
and tighten its belt too.
To be more specific, every dollar of government spending or "bailout" is a dollar taken from
something else or created from thin air. It is worse than government doing nothing because it
postpones the day of reckoning for unsustainable economic activities, both by firms and by
individuals. It draws resources, both labor and capital, into uneconomic activities, activities that
would not be chosen by firms and individuals if they had a choice.
The long-run effect of such spending will be as it has been twice before: a drastic lengthening of
the recovery process. Compare the U.S. depression of 1921 with the Great Depression and the
experience of Japan. What, you never heard of the depression of 1921? Based on unemployment
and other figures, it was as bad or worse than the Great Depression. But the government kept its
hands off and the order created by the market restored balance in a year or so (they were over so fast, these things used to be called "panics", for example, the Panic of 1907, "depression" was
considered gentler. Then that word was dropped for "recession").
But the U.S. government's interventions starting with Hoover and then FDR prolonged the Great Depression until 1946. Similarly, when Japan's real estate and stock bubble burst in 1989, the Japanese pursued a course not unlike what Obama promises: large deficits, huge government works, and propping up of bankrupt and insolvent firms. The result has been a malaise lasting almost two decades, with virtually no recovery of their stock market in that time. That may not sound so bad right now, but Japan started that period in a much stronger position than the U.S. is now, with surpluses on their balance sheet, rather than huge deficits. It will be much worse here.
I'm sorry to be Mr. Doom and Gloom, but that what it looks like from my point of view. I was
introduced to Austrian Economics thirty years ago and have seen it rise in popularity
tremendously, but it is still very much the underdog. That's too bad. Maybe as the disaster
unfolds, the grip of the Keynesians will loosen and people will look for a theory that makes
sense. Maybe they will take heed of the fact that Peter Schiff started predicting two years ago the crash we've experienced (see http://www.youtube.com/watch?v=B8r-nDBx5Jg or go to
YouTube.com and search for 'Peter Schiff was right' to see other economists ridicule his
predictions). He was not the only one, other Austrian economists did the same. But as of yet, no
one is listening.
--Scott
