What Should Austrian Macroeconomics Resemble?

Noah Smith writes,

So it basically seems to me that the New Classicals captured and improved on the basic ideas of the Austrians in almost all of the ways that matter, while vastly improving on the presentation. New Classical concepts of rationality, distrust of empiricism, and distrust of government intervention are more moderate and nuanced than those of the Austrians, and their mathematical style is simply much more appealing to modern academics than the dense, turgid prose of von Mises or Hayek. Thus, if you were a smart young macroeconomist in 1980 who believed that people were both rational and smart, that government intervention was a bad idea, and that theory was the best way to investigate human behavior, you did not become an Austrian; you became a New Classical.

Not me!!

What I don’t like about Austrian macro is the focus on the central bank as the sole source of distortions. But I see New Classical as horrible along almost every dimension. I do not like the math. I do not like rational expectations (it is a very anti-Hayekian notion, that we all have the same information). I do not like the representative-agent formulation, because it rules out important co-ordination problems. I do not like the production function, which ignores the roundaboutness of production and what Fischer Black emphasizes, which is that people invest in all sorts of physical and human capital under conditions of uncertainty, and sometimes their capital ends up not so valuable.

I do not like AS and AD, which I think channel people’s thinking narrowly. AS and AD are like a pair of glasses that make you see the world only in black and white and in two dimensions. Sometimes, simplification is good, but not when you miss the color and the depth.

I do not like a priorism, but I see macro as only faux-empirical. As Noah pointed out in a previous post, the macro equations are not verified (or even verifiable) in the real world.

Moreover, the data with which macroeconomists work is very problematic. Who can be happy with how the money supply is measured? Or prices? Or even GDP–what is the GDP of Google? The measured economic activity consists of advertisements. Do we think that measures Google’s output?

Maybe the worst-measured variable of all is productivity. How many workers in the U.S. are in large organizations where they spend time reading email, producing reports, and going to meetings? I am going to go out on a limb here and say that these are, on average, productive activities. They produce some sort of organizational capital. But they do not produce output in the here and now. So if you divide this month’s output by this month’s hours spent on the job, that is inaccurate, because a lot of this month’s work is about output in later periods.

Finally, my first forays into macroeconomics (see my book) were when macroeconometricians tried to pay attention to special factors that messed with their data–steel strikes, tax-law changes, automobile sales-incentive programs, and so on. Now, it’s like “We don’t care. Stick everything into a vector-autoregression and accept whatever the computer spits out.”

The bottom line: Austrian economics ought to resemble PSST, not New Classical.

7 thoughts on “What Should Austrian Macroeconomics Resemble?

  1. Aggregate supply and demand seem like a very contorted way of talking about the supply and demand for money. Why don’t people just talk about the supply and demand for money? Isn’t the old joke that if you teach a parrot to say ‘supply and demand’ then you have an economist? Perhaps if you teach a parrot to say ‘aggregate supply and demand’ then you have a macroeconomist.

  2. The fiat banker did not do it. Even when the Fed distorts the curve, money is still much more accurate than shoes, and for a minor fee the Fed distortions are removed by the financial sector.

  3. Noah’s argument is not very convincing; his depth of knowledge of history of economic thought seems lacking.

    First ABCT and ratex are incompatible. The core assumption of ABCT is the locality of information, which is a very different assumption. ABCT violates ratex.

    Second, he discusses the Austrian school as if it started with Hayek and Mises. He really looses the thread on that one. Mises and Hayek of course were students of the Austrian school whose basis was in the work of Carl Munger and Eugen Böhm von Bawerk. Noah is right that the Austrian school was subsumed into later traditions but he gets the detail wrong: it was the Austrians who started marginal revolution, who codified the basis of interest-rate theory that led to Wicksell leading into Irving Fisher.

    Indeed, Irving Fisher himself credited the Austrians as the basis of his work, and arguably he was instrumental in folding the work of the Austrians into the neoclassical tradition.

  4. Two basic assumptions are in play, do we minimize transactions or minimize volatility. Neuroscientists claimtransactions and that makes Austerians correct, without the central banker problem.

    • The financial markets are like a huge lake, and monetary policy is like tossing pebbles–it makes a few ripples, but it does not really disturb the lake.