Austrian economics

The Fruits of Neoliberal Economic Thought.

Over the weekend, when I was not playing poker, I read this long piece on neoliberal economics. It’s a very long, exhaustive and thick read and it took me a while to absorb all the major points. I wanted to distill this excellent critique of neoliberalism into a few distinct points, mostly for myself, but also for those interested who don’t have the luxury of 2-3 hours of undisturbed time.

  1. Recent economic order seems to reward paper speculation and penalize work.
  2. Governing elite’s response to the recent crises is to double down on old dogmas: reduced government spending, low taxation, worship of markets to cure social ills.
  3. Our public life is thus a hostage to neoliberal market idolatry.
  4. This ideology, however, never holds any of the elites responsible or accountable for the system failures.
  5. Originally, neoliberal thinkers positioned themselves as observers and thinkers above the fray, intellectuals who looked for refuge from the New Deal liberalism. Their early association served as a basis for founding of the Mont Pelerin Society. A few decades later it coalesced around the Austrian anti-Keynesian economic thought, with F.A. Hayek at the helm.
  6. Hayek and his contemporary and intellectual comrade Ludwig von Mises, both haunted by the terrors of totalitarianism and exiles from Nazi regime shared their sense that free-market liberalism was the only answer to fascism and communism.
  7. However, Hayek drew his inspiration from Karl Popper, another economic philosopher, known for his “open society” ideas, who understood that individual liberty doesn’t have to be antithetical to economic democracy. Such philosophy permitted the adoption of egalitarian, even redistributionist policies.
  8. But Hayek chose intellectualism over practicality. He reasoned that an “intellectual adventure” even if it’s utopian in nature is what’s needed, rather than “practical compromises”, which should be left to politicians.
  9. The biggest irony is that Hayek’s utopian longings were fully realized, in Reagan’s America and in Thatcher’s Britain, but failed to bring the results he envisioned.
  10. Enter Milton Friedman, the monetarist from University of Chicago, who popularized the purely intellectual strain of Hayek’s neoliberalism. He advised Reagan, Thatcher, and Augusto Pinochet, had a regular column at Newsweek, a hit series on PBS, not to mention his association with Cato Institute, Heritage Foundation and American Enterprise Institute.
  11. With such an advocate, the free-market gospel has multiplied all over the globe. Along the way, the gospel managed to mutate from simply worshipping the markets to demonizing all public sphere. It is at that point, the 1980-90s, that the suspicion of government, or of anything “public” first took shape. Friedman believed and made others accept it as an axiom that a government, by its very nature, can’t serve the public interest.
  12. Regulations and any government involvement is thus to be resisted, or to be rid of, which is what’s been happening since the 1980s, culminating in 2008 crisis. But it’s not the lack of regulations that is the culprit in neoliberal thought. Conveniently, neoliberals are now focusing on a problem of regulatory capture: you see, the regulators rotate between the government and the industry, thus confirming the neoliberal idea of the evils of government.
  13. Because government itself is full of “defects”, according to Friedman, it therefore cannot be the one to regulate whatever flaws happen to appear in the markets. Neat logical trick, isn’t it? And that’s where we are today.
  14. The neoliberal thought that has enthralled most of today’s politicians, stymies any attempts to stimulate economy through government spending. The entire focus of the elites, nowadays, seems to be revolving around placating the “job creators,” and any suggestions to raise taxes on the rich or to help the poor are to be nipped at the bud.
  15. The author gives an example of the destructive force of such an uninhibited capitalism: the factory collapse in Bangladesh that killed more than a thousand workers. What the disaster like this should have demonstrated, is that regulations are “a largely cosmetic watchdog effort funded overwhelmingly by private-sector concerns, far from delivering oversight and accountability.” What aggressive free market delivers is “race-to-the-bottom competitive forces…that ritually sanctify all of this routine dishonesty. In their malignant neglect of worker safety measures, local factory managers are able to cite the same market pressures to maximize production and profit that have prevented the ornamental Western groups conducting audits of workplace safety practices from releasing their findings to the workers at risk of being killed by the neoliberal regime of global manufacturing.”
  16. But Chicago and Austrian scholars are unfazed by such misfortunes. It’s just a cost of doing business. Their response was a predictable call to resist the passage of any new laws to improve worker-safety standards or to allow “workers to veer into unionism or other non-market-approved modes of worker self-determination.”
  17. The grip of neoliberalism is still strong today, even among liberals. Everyone feels like they have to at least pay lip service to the wisdom of markets, if they still want to be admitted to the discussion.

This is what happens when you run a conspiracy blog.

Zerohedge – the anti-Fed, libertarian, gold-standard conspiracy blog, that’s been seeing inflation and economic collapse everywhere for the last 5 years, scored a big victory lately. Or so they think.

Russians have pulled about $100bn of Treasuries that they held in custody accounts at the Fed. To me, and to any reasonable person I would think, the answer for such a massive pullback is simple: they are trying to avoid the Ukraine-related asset freeze.

Not so with Zerohedge. They got the same data, too, but their conclusions are all over the place, and none mentions the most obvious one. I guess when you run a conspiracy blog, the easiest explanation for any event is always the most suspect.

So either China selling TSYs and buying EURs to make European import power
stronger, if not so much its exports (much to Draghi’s ongoing horror). Or
Russia, which may be dumping USTs to support the ruble… Or dumping just
because.

“To support the ruble”, “Just because”. Right!

And the comment section is predictably trashing the Fed and the “printing presses”.

Rupert Murdoch makes a weak case for the morality of markets.

Rupert Murdoch, chairman and CEO of News Corporation, addressed the morality of free markets in his recent editorial. The essence of Mr. Murdoch’s argument is that free market is inherently moral and that greed is not the driving force of success.

“The market succeeds because it gives people incentives to put their own wants and needs aside to address the wants and needs of others. To succeed, you have to produce something that other people are willing to pay for.” Mr. Murdoch writes.

Let’s dwell on this for a moment. Benevolence is not why people start a business. Businesses are profit driven. Some enterprises can begin as an experiment and be iconoclastic and pioneering in nature, like Apple; the rest are founded with the sole purpose of making a profit. If someone wants to put his own wants and needs aside to address the wants and needs of others he volunteers or starts a non-profit.

One can’t mindlessly marvel at the virtue of the free markets without considering the following: people are not always rational; markets do not always self-correct; there are informational asymmetries between transaction parties; there’s an agency problem (that is when a hired representative, in business or in public life, represents his own interests rather than the client’s). If we lived in an idealistic world of artisanal mom and pop shops, Mr. Murdoch would have a case for the morality of market participants. But when those small shops run out of natural customers the troubles begin. Embarking on the quest of permanent growth, those businesses tend to enter the realm of creative finance, consolidation, dubious products and political favors. Business models for many big firms have long ceased to resemble the innocuous model that some laissez faire idealists subscribe to. We’re not living in the world of mom and pop cupcake stores and community banks anymore. Consumers’ interests and corresponding profits are not aligned anymore: customers and their interests are secondary to the interests of shareholders and investors. Because everything is put at the altar of “growth” there’s a point where a business begins to invent useless or harmful products (addictive prescription drugs, subprime mortgages, leveraged buyouts, entertainment disguised as “news”).

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Some conflicted professor has advice for Keynesians.

A confused professor thinks we, Keynesians, don’t understand Keynes at all. He thinks we think Keynes advocated for planned economy and proceeds to demonstrate that Keynes was at times a supporter of free markets. As such, Keynesians and progressives in general, in his view, lionize him for some ideas that he did not have. He doesn’t think we can support Keynes for the ideas that he actually professed, because in a conservative two-dimension world there are only two choices: free markets and communism and we must be for the latter.

 “Assumption is a mother of fuck up” – is one of my favorite expressions. The author of this article assumes a lot. For example right after he quotes Keynes: “the political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty” he proceeds to assume that Keynes was looking to force social justice at the cost of economic liberty and efficiency.  Why doesn’t he assume that Keynes was looking to force economic liberty at the cost of social justice and efficiency, or efficiency at the cost of social justice and economic liberty? Or why does he think that Keynes was looking to force anything at all, by merely stating a problem? Why such a conclusion?

I was getting more and more confused with the point the author was trying to make as I read a long. If, according to the author, Keynes was such a heavy-handed Commie, then how I can take the later argument that Keynes, after all, was for free markets, seriously?

“In addition, he believed in cutting taxes in recessionary times to stimulate economic activity and raising taxes during times of prosperity. This is contrary to the modern liberal philosophy of raising taxes and spending ad infinitum.”  WTF? Didn’t Obama just kept tax cuts for 98% of Americans, not to mention his tax cuts a few years ago that everyone forgot about?

Dean Kalahar claims to know what we, Keynes supporters, supposedly don’t know. He thinks we don’t know that Keynes wasn’t adamant about rejecting free markets when he delivers Keynes quote: “The engine which drives enterprise is not thrift, but profit” as some kind of revelation that will prompt us, Keynes supporters, to renounce him. He probably thinks that if we support government planned economy (a mistaken belief in itself), why would we waste our time with lukewarm and conflicted Keynes instead of aligning directly with the grandfather Marx himself?

“Whichever the case, if Keynes is the darling of the progressive left, they ought to have the guts and intellectual integrity to accurately portray the man they are canonizing and actually align their actions to his words.”  But we do! We do see the world like he did, in gray, not in black and white as Milton Friedman acolytes. We do believe in applying appropriate remedies as a certain situation requires, not a one-size-fits all laissez-faire free for all, all the time. We acknowledge that there are times to cut taxes and there are times to raise taxes. For conservatives, there are no circumstances under which taxes should be raised.

Why laissez-faire advocates are wrong to resist regulations.

My critique of unregulated markets does not stem from the fact that I long for a planned economy. Quite the contrary: I criticize the unregulated markets because their occasional failures revive the delusional far left theories that we all thought were put to rest a long time ago.  And when the free market advocates ran out of defensive arguments and when the evidence shows how wrong they were, then they are exposed to and defenseless against the public furor that, especially after what we’ve been through in the past 5 years, has a justifiable tendency to overreact. People like myself, who criticize the laissez faire system, are routinely portrayed as socialists by those who are too lazy to think. But we all witnessed, over the past few years, that there’s a point where competition and innovation give way to inertia, abandon, hubris and self-delusion. If such factors could be measured numerically, a replica of a Laffer curve would be appropriate to describe the predicament, where X axis is a number of innovations and Y axis is social utility of such innovations. At some point the relationship between the two breaks down and becomes negative.

Many supporters of free markets don’t see a problem here. When crises, like financial crisis of 2008 happen, they view it as a system glitch that would be self-corrected if only the government minded its own business. Some of my readers surely think that I’m a closeted Commie (although I’m merely a Keynesian), but there were times when I thought Milton Friedman, like Clapton, was God! I am, however, also a person who is moved by empirical evidence and if I see that there are too many exceptions to a theory then I begin to question the validity of such theory. Right now I see that people are not rational; that markets do not always self-correct; that there’s not always equal access to information between the transaction parties; that people can use agents that are self-interested, etc. All of this is enough, at least to me, to pause before marveling at the virtue of free markets. Milton Friedman was lucky that during his lifetime the economic circumstances seemed to confirm the superiority of his economic theory. I’ll quote:

“Friedman was also the beneficiary of the postwar economic boom and of global economic conditions that readily resonated with his ideas. During the period between the late 1960s and the mid-1970s, ‘his ideas seemed irresistibly prescient, and those of his numerous opponents repeatedly wrong’. Friedman did not face a world where economic planning enjoyed ideological hegemony. In such circumstances, his free-market liberalism was of the moment and his receipt of a Nobel Prize in 1976 merely confirmed this.”

Some conservative thinkers, even back in the 1970s when the free-market capitalism was clearly proving itself to be a superior social and economic order, realized the long-term fragility of this theory. Friedrich Hayek, the author of the conservative bible “The Road to Serfdom”, understood it even during the heyday of laissez-faire ideas. He realized that in the absence of the Soviet Union and its planned economy as an example of what not to do, there has to be a moral foundation for capitalism’s values. But there was none.

Irving Kristol (the father of William Kristol who founded the conservative Weekly Standard magazine) too criticized market advocates for promoting materialism and for fighting an ideological war that has largely been settled and urged conservatives back in the 1970 to begin to build a moral basis for capitalism. He noted that the new battle should be fought around values, that is, social values.

Conservatives tried to do that in subsequent decades, but the alliance between social conservatives and free market advocates always had an artificial feel to it, like a marriage of political expediency, not of natural compatibility. The former believe that the human nature is wicked and must be somehow controlled or restrained (either by religion or by some other methods); the latter believe in human rationality and ability to make the right decisions. It’s like mixing oil and water. It’s breaking right now before our very eyes.

If conservatives are so afraid of collectivist ideologies and believe that those will never go away completely, they have to build a solid defense against them rather than mock them. One day accusing your opponent of being a socialist might not suffice. In the 60s, 70s and 80s, the existence of a real life collectivist experiment made it possible for conservatives to demonstrate their moral superiority with ease, but now that the Soviet Union is gone the burden of proof is on the conservatives themselves. I suggest that the first step to build such a defense should be to embrace regulations. Free market advocates are afraid that by embracing regulations they will somehow admit the imperfections of their ideology; thus they are incapable of looking at regulations as a tool that can come in handy when confronted by hardcore Commies. (Note: I, of course, don’t think that Commies are coming – conservatives do). The obstinacy with which conservatives cling to free markets ideology makes them weaker when facing opponents that under normal circumstances can be easily defeated. Their tactics and strategies seem tone-deaf and oblivious to widespread public anger, both on the right and on the left. The equivalent of such tactic on the left would be a complete denouncement of a capitalism system. But those kinds of far-left voices, while existing on the fringes, are forcefully rejected by the mainstream Democrats who merely advocate a regulated capitalism and a modest increase in taxes, not a collectivist utopia. Keynesianism can be a salvation, not an inhibitor. If socialism, the real socialism comes to America, ironically, it will be the Democrats that are best equipped to fight it, not the Republicans.

I cannot stress this enough, so I will repeat myself. After you accuse me of being a socialist know this: I’m trying to help the supporters of free markets. If the foundation of their ideology is weak, we all risk sliding into an alternative social order. If you can’t demonstrate that your system of belief is superior you only have yourself to blame if the assortment of Commies will have a stronger case (and public opinion) on their side. That is a major reason I support a stronger regulatory environment – not because I’m anti-business or anti-capitalist – but because I want to protect market participants from inadequate behavior that can discredit their philosophy and expose them and eventually the public to a harmful outcome.

David Frum on Austrian Economists

I like David Frum more and more. He’s a great example of a thinking conservative.

Why Conservatives Dumped Milton Friedman.

There are two big reasons today’s right loves the Austrians. One is that Austrian economists reject empirical analysis, and instead believe that you can reach conclusions about correct economic policies from a priori principles. It’s philosophy dressed up as economics; with the Austrians, there is never any risk that real-world events will interfere with your ideology.

In other words, if you adhere to Austrian experience-prone economic thinking, you’ll never be proven wrong and thus you’ll never have to defend your flawed theory, even when faced with the failure of free-market economics leading up to 2008 crisis.