The Best Rallying Call for Austrian Economists Yet

|Peter Boettke|

Mario Rizzo at ThinkMarkets.

I used to tell my Fairfax Stars basketball team when we were set to play an elite squad full of HS All Americans that a great challenge also is a great opportunity. Mario is in essence telling us the same thing. 

I for one am ready to go to work. Put me in coach.

Comments

[Troy Camplin]

What position does an Austrian economics-influenced humanities scholar have on the team?

[Daniel Kuehn]

Peter -

One of the points that Rizzo emphasizes here is an empirical Austrian economics. I think this is very important.

I wrote a longish post on my blog detailing exactly what kind of empirical project I think Austrians could and should engage in here:

http://factsandotherstubbornthings.blogspot.com/2010/09/thoughts-on-empirical-austrian.html

I'd be curious to see what you think of it.

I can't get on board with this "Keynesianism as religion" stuff, but I certainly strongly agree that the Austrian school could and should engage with the mainstream more consciously, that such an engagement should focus on empirical work, and that both the profession and the Austrian school would benefit from that.

[Angel Martin]

Partly related to this issue may be the debate on the desirability of making econometric work to illustrate, for instance, the ABCT.

RAE has a new paper on this by Andrew Young (http://www.springerlink.com/content/5119548488q61402/): "Illustrating the importance of Austrian business cycle theory: A reply to Murphy, Barnett, and Block; A call for quantitative study"

[Daniel Kuehn]

Angel - thanks for the link. It doesn't seem to work for me, though (I think the parenthesis is caught in the hyperlink). Try this:

http://www.springerlink.com/content/5119548488q61402/

[Angel Martin]

That's it, it was my mistake. Thanks for the correction, Daniel.

[Jule Herbert]

So what are these empirical studies supposed to prove? That minimum wage commands cause unemployment? That the funny money banking system causes business cycles? That, when the State seizes and diverts resources from property owners for its own purposes, there are negative consequences?

Are not these things well known by fair-minded people? The pathology that needs explanation is why academic economists can make successful careers denying these propositions, as they shill for the state apparatus. A good recent start is this article on Wilson in the Independent Review:http://independent.org/publications/tir/article.asp?a=805

[Bill Stepp]

Following up Jule Herbert's point, another pathology that needs explanation is why ostensibly private firms such as the New York Times give high-profile writing positions to state-shilling hackonomists such as Paul Krugman.

Btw, has Krugman ever penned one word about the causes of the economic misery in workers' paradises such as Cuba, North Korea, and Venezuela? Just asking.

[Rafe Champion]

Tried to comment on the Kuehn blog but it did not think I am a real person. The point was about his claim that regime uncertainty does not show up in the data. Different data may be required which was one of Mario's points about the way current data sets reflect the interests of other schools of thought. In advance of the data the case is made by "situational analysis" or "the logic of the situation", like how much of your fortune would you put on the line in a situation where you might get blindsided by a heap of new regulations?

[Rafe Champion]

Troy if you are white and less than 150 kg you had better try out for quarterback.

[Troy Camplin]

Well, I'm only 5'6", so I'm happy to say I'm quite a bit below 150kg! :-)

[Pietro M.]

Mises was quite explicit in Human Action that relevance cannot be assessed by pure apriori arguments, and that historical understaning (I add: econometrics included) was necessary to understand whether the "apriori correct theory" explained 0.0001% or 100% of the observed phenomenon.

On this point, Young was quite close to Mises. The problem is that Mises never concluded that empirical assessments were a necessary part of the work of an economist in order to prove the importance of the theory.

What I don't get, and I'm reading about it, is how monetary shocks can be assessed. As far as I know, there is no credible test of non-neutrality, and no econometric test has ever decided between the King/Plosser "neutral money affected by the real economy" view and the CHristiano/Eichenbaum/Evans "nonneutral money affecting the real economy" view.

This problem is likely to be inherent in the confusion between causality and correlation on which Granger tests are based. If I don't die of boredom, I'll get through some of this literature in the next months.

[Daniel Kuehn]

Rafe -

Sorry about that - sometimes it's weird. I wanna be clear I have absolutely nothing wrong with the regime uncertainty point. It's not that it's "not there" so much as it "doesn't seem to be there as a primary factor". On a more practical point it's also tough to know which direction to go in. When there is disconcerting regime uncertainty because a stimulus bills stands in the balance, does it reduce uncertainty and increase demand to pass the bill or put it to rest permanently? Objectively, Peter might say it would reduce regime uncertainty to not pass it and I would say it would reduce uncertainty to pass it. Businesses are probably going to be just as divided on the question, so it may be that no solution decisively reduces regime uncertainty.

[Rafe Champion]

Daniel, how would you like to be in the health insurance business right now?

[Daniel Kuehn]

Rafe - I'm not sure if you're joking or if it's genuinely not getting through to you that what I'm saying is that I don't think regime uncertainty offers the primary explanation for the downturn. I'm not saying there isn't regime uncertainty - I've never said that. And I've certainly not been a dew-eyed innocent on health reform of all policies, and have regularly criticized major facets of it.

The question for me is - does it explain the downturn (or the Great Depression, for that matter - where it is also mentioned)? I don't see how it's a convincing explanation. That isn't to say it's a small, negligible, or non-disruptive change. I've got some thoughts on it, but I'm not really qualified to comment too extensively on that anyway.

[Daniel Kuehn]

And actually, health reform is an area where the regime uncertainty case itself gets a lot muddier.

If uncertainty is the issue you'd think things would have improved by now. You could argue that health reform introduces costs and inefficiencies (I argue that, at least w.r.t. the mandate), but you can't argue that uncertainty is still looming about it. People now have a sense of what's coming. So where is the uncertainty?

You can still make a "expectation that taxes will increase" case for slower growth, but this is a fundamentally different argument from the usual "regime uncertianty" point. The paralysis from uncertainty itself should be gone, shouldn't it? After a while, the only way to maintain any reasonable "regime uncertainty" argument is to take an unjustifiably paranoid attitude towards the administration and "what it will do next" (which seems pretty overstated given the likely Republican control of Congress that we'll see). I'm guessing the big initiatives of this administration are essentially over. A little uncertainty over this consumer finance agency, but for the most part the dust has settled and gridlock is going to keep it fairly settled.

With a settled policy landscape, tax rates no higher than the Clinton years, and tame inflation the case for regime uncertainty gets thinner and thinner. The only way firms would be uncertain in the sort of Higgsian sense you hear a lot is if all our entrepreneurs were Austrians. And the thing is, they're not. By re-imagining entrepreneurs in their own image, I think a lot of Austrians have vastly overstated the policy uncertainty story.

[The_Orlonater]

"If uncertainty is the issue you'd think things would have improved by now. You could argue that health reform introduces costs and inefficiencies (I argue that, at least w.r.t. the mandate), but you can't argue that uncertainty is still looming about it. People now have a sense of what's coming. So where is the uncertainty?"

It's a 2,000 page bill, secondly, it can signal a path of more activist government.

[Daniel Kuehn]

re: ""It's a 2,000 page bill""

Point?

re: "it can signal a path of more activist government"

Note how I said "You can still make a "expectation that taxes will increase" case for slower growth, but this is a fundamentally different argument from the usual "regime uncertianty" point. The paralysis from uncertainty itself should be gone, shouldn't it?"

[Troy Camplin]

Of course there is uncertainty with the current health care law. We have no idea what is actually in that 2000 pages, and we have no idea how the bureaucracy will actually implement it. Even Pelosi said, "We have to pass it to find out what's in it." In other words, we have to wait for it to be implemented to find out what will actually happen. It hasn't been implemented yet, and it will be implemented over time, so there will continue to be uncertainty in this are for a long while yet. Further, the almost random way this administration implements policy creates uncertainty. In the bailouts, who knew who would be bailed out and who wouldn't? Who knows if taxes are going up, and for whom? Who knows if there will be another "stimulus," and where that money will come from or where that money would go to? Will the ongoing recession (recent claims it "ended" a year ago notwithstanding) result in more business failures? If so, will our government bail them out or not? or nationalize them, too? Who knows?

I know, I know, you point to polls that don't show "regime uncertainty." Big deal. Unconscious awareness and processes have never polled well.

[Daniel Kuehn]

Troy -
But practically speaking, what uncertainty about the bill is there that's substantial? We have the broad outlines. At the very least we have considerably less uncertainty than we did a year ago, right? That we should be able to agree on unequivocally.

Any uncertainty about taxes is going to be most substantially tied to health reform. There's also uncertainty around the long-term state of entitlements, of course - but that concern has been on the table for years. It's not news that we have an entitlement problem. It's not news that tax rates don't match up with spending. These are real uncertainties - I've never denied that. I've said they are. The question is - are they legitimate explanations for the downturn? That seems very, very weak particularly in the absence of any corroborating data.

[Rafe Champion]

Does anyone claim that there is a single reason for the downturn?

Daniel, there was once a king or an emperor who was unhappy with the performance of his troops, so he had one in ten shot "to encourage the others". Now the health insurance industry has been shot, do you think all the surviving entrepreneurs in the nation are encouraged?

Regime uncertainty is something where there could be a some fruit to gather without big mathematical ladders. Same data indicate that business people say their biggest problem is that people are not placing orders - the obvious Keynesian response (done by the Australian government) would be to give folk money to spend. But the research would ask different questions, like "do you think you would get a fair and reasonable hearing from these? - list a number of regulative agencies from the IRS to EPA and equal opportunity and anti-discrimination bodies.

What do the Keynesians have to say about productivity and the factors that encourage workers produce better and more efficiently. You might say that Keynesians address different issues but surely well-trained economists should be able to apply the economic way of thinking to all issues.

[Steve Horwitz]

To be precise, I don't believe anyone has said that "regime uncertainty" is a cause of the "downturn" properly speaking. Regime uncertainty, and this is the use to which Higgs puts it in the original article (which does contain empirical evidence), was an explanation for why the Great Depression lingered - i.e., why recovery was so slow/so long.

It's a legitimate question to ask how much regime uncertainty is currently in play, and how much it matters, but RU explains (or contributes to explaining) why conditions haven't improved more quickly, not why we had a downturn in the first place.

[Troy Camplin]

Daniel,

ABCT explains why we had the downturn. Regime uncertainty (and continuing to do the same idiotic things that caused the downturn in the first place) are what have kept us in it. Just like in the Great Depression, one stupid move after another by the federal government has kept it lingering. That's regime uncertainty. Everyone else here has been talking about the continuation of the recession. Until you said otherwise, everyone else assumed you were in fact talking about the same thing everyone else here was.

[Rafe Champion]

What Steve and Troy said. Thanks to political activist judges there is a kind of regime uncertainty operating in the court system which in a liberal order would be the foundation of regime predictability.

Something like regime uncertainty has become systemic and deeply entrenched, like gravity it is pervasive, it is practically a given, so you can hardly make a move in business or investment without getting professional advice to be sure you are on side with all the regulations, even then there are so many regulations in some areas that interpretation is a legal minefield.

There is also the issue of "rules and orders" signalled by Hayek and Popper; for politicians in a hurry changing the laws is not enough, they really want to give out orders and that is the road to anarchy (but not the kind the libertarians want).

BTW this following comment belongs on the maths thread but it is intereting to see that the Greek government did not get adequate advice from competent welfare economists, so it was left to the truck drivers to tell them that the proposed reforms are not Pareto optimal.

[Daniel Kuehn]

OK - when I say "the reasons for the downturn" - I don't mean the shock in 2008. I think everyone essentially agrees a housing bust that brought down banks neck-deep in MBS's did that. I didn't think there was any disagreement on that. The downturn itself, though - has that been shaped by regime uncertainty?

My first point is simply that to see more uncertainty in the current administration you have to assume the entrepreneurs think like Austrians to a large extent. Half the country felt like things got marginally saner in the last couple years (I emphasize "marginally"). But, even if the things going on make you less uncertain there are still obviously major initiatives going through - health reform being one of them. But the point is has uncertainty increased or decreased there? It seems to have DECREASED over the last year. Passing the bill should have decreased uncertainty but people act like it increases uncertainty.

Which brings up another problem - very weak operationalization of any of these ideas, which of course makes it hard to evaluate, which of course is quite convenient. When people actually point to somewhat decent data like the NFIB surveys and say "gee - it looks like people are about as worried about policy as they've always been - I don't see much of a relationship" it's rejected as meaningful. So what would be a meaningful test of this?

[Daniel Kuehn]

I suppose the whole thing, to me, just smacks of coming up with an economic theory that supports whatever political goals you have. I don't think anyone does that consciously, but it doesn't seem to be the most obvious fit to the evidence and it gets paraded around regardless of whether policy has become more or less uncertain.

[Steve Horwitz]

There is also the question of empirical evidence. Bob Higgs has had several blog posts in the last couple of weeks providing more evidence, both data-based and anecdotal, for the ongoing *existence* of regime uncertainty. How big an influence it is remains arguable, of course. So before one makes the claim that it's a theory constructed to meet ideological priors, I would suggest that one read what Bob is writing, including the original article that provided the evidence for the GD.

It's funny that you are chiding Austrians for being unwilling to look at the empirics Daniel yet you seem to wave away or ignore the evidence that Bob has brought to this issue. Of all the generally Austrian-oriented economists out there, Bob is one of the best at actually finding and using data to support his work - which might explain why he's hit the JEH and other journals not known for their free market biases.

[Daniel Kuehn]

Steve - well to repeat, I don't think it was created to serve ideological priors. But that facet is there, which may explain some of its persistence.

I'm not aware of Higgs's blog - I'll have to check it out and add it to my blogroll.

Neither ignoring nor waving away - unaware. I'm following now.

Out of curiosity - how would you falsify regime uncertainty, or how would you allocate a degree of explanatory power to it? My concern is that a lot of what I see consists of "look at these things FDR did that made people uncertain". It's hard for me to attach a weight to that. I'm not completely unreceptive to the point, but I'm not sure where to go with it. And I don't know what to make of people who think that regime uncertainty has increased rather than decreased from 2009 to 2010, for example.

[Daniel Kuehn]

By the way, Steve, one way NOT to respond to the regime uncertainty case is the way that Gauti Eggertsson responded to you in EJW. I hadn't followed his piece or your piece before that, but even just reading his most recent reply he seemed to be missing your point.

[Mathieu Bédard]

One way to falsify RU would be to closely at the flight to quality during those episode, see if there is an increase in the demand for assets less easily influenced by policies relative to "quality" easily influenced by policy. I'm not exactly sure what those are (foreign assets..?), a tax advisor would probably know. If you don't see any preference for that kind of asset RU doesn't hold.

There are probably much better ways to quantify/falsify RU. Maybe Robert Higgs offers one such himself, I have to admit I haven't been following this debate closely. But your claim that it's just ideology isn't very serious, no matter how many times you repeat it, rephrase it, re-comment it, etc.

[Troy Camplin]

So a time when there wasn't a health care bill, let alone legislation, has as much regime uncertainty as a time during which a bill is being debated, and after which it has been passed, but hasn't been implemented, so people don't actually know what's in it (according even to Pelosi), and during which time there is an election where the opposing party is proposing making changes in that same health care legislation. Right.

[Roger Koppl]

Big Players theory can be thought of as regime uncertainty with analystical bite. I have subjected it to potentially falsifying statistical tests. So far, so good. See my 2002 book. Or look here for starters:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=22921

[Daniel Kuehn]

Mathieu -

RE: "But your claim that it's just ideology isn't very serious, no matter how many times you repeat it, rephrase it, re-comment it, etc."

For the second time now, I never made such a claim, I've never believed such a thing, and I've always found regime uncertainty to be a reasonable explanation of downturns. My only question is whether its a prominent explanation.

Ideology plays a role in the persistence of regime uncertainty arguments just as ideology plays a role in the persistence of any argument. Keynesianism provides support for liberalism. Regime uncertainty provides support for libertarians. It should be uncontroversial to note that the ideological content of these thoeries plays some role in the debate.

If you want to cite where I said that "it's just ideology" be my guest and I'll eat my words. But I've never thought that so I have a very tough time believing I ever said anything like that.

[Troy Camplin]

A few thoughts on ideology:

http://zatavu.blogspot.com/2010/09/blinded-by-ideology.html

[Kyle8]

I would say that a large part of "regime uncertainty" comes from our tort system. Since every time you have a class action lawsuit it is a crapshoot.

There is nothing more frightening to businessmen to see that their profits might be looted for either unrealistic judgements, or liability for things that were not in their control.

[Daniel Kuehn]

Kyle8 -
That's interesting - a lot of people hold up tort law as the way to handle things like externalities.

You may be right, but this clearly can't explain the business cycle, can it?