Koppl on Confidence and Crises

|Peter Boettke|

I have linked alread to Roger Koppl's brilliant From Crisis to Confidence: Macroeconomics After the Crash (2014).  If you haven't read it, do yourself a favor and read it asap.  If you have read it, and you are teaching advanced macro, get your students to read it asap.

I have always found Koppl to be one of the most fertile minds I know within my generation of Austrian economists.  We also share a certain attitude about how Austrian economists must conduct themselves within the broader profession of economics in order to advance the scientific and scholarly tradition of Mises and Hayek.  So I am no doubt a sympathetic reader of Koppl in general and this project in particular.  But even with that in mind, I encourage you to listen to me on this rather than dismiss as hype.

Koppl produces in a relatively short monograph (163pp) a concise history of 20th century macro, a summary of the state of the field in the 2000s, and the challenges that must be met in the wake of the financial crisis of 2008.  Throughout it all, Koppl weaves the Austrian monetary theory of the business cycle seamless through his narrative.  In addition, he builds on his earlier work on "Big Players" and the work on regime uncertainty to really develop a theory of confidence, rather than just notions of confidence as central to macroeconomic theories of volitility.  My favorite passage from his work is:

Big Players and regime uncertainty create and increase the very sort of uncertainty that Keynes described.  If we may call such policies 'Keynesian' then we may draw the inference that Keynesian policies tend to create and enhance the irregular ups and downs that Keynes attributed to modern capitalism as such.  In this sense, Keynesian policies tend to create a Keynesian economy. Those post-Keynesians who argue for discreationary state intervention as a result of certain features of economic behavior argue for policies that will increase -- rather than reduce -- the very behaviors they see as the problems. (104)

 Earlier in the work, Koppl does what I consider a masterful job of reconciling Fisher's debt-deflation theory with the Austrian theory of the business cycle -- as he explains the debt disease is caused by the injection of false credit into the system, and the dollar disease is brought on when rather than engaging in hyperinflation the monetary authority slows down the rate of monetary expansion which creates a liquidity crisis.  The debt disease in combination with the dollar disease creates havoc in the economy. (see 33, fn 7).

How does Koppl suggest we can resolve the problem?  By shifting to the constitutional level of analysis in a very Buchananesque move.  But as he points out: "The constitutional turn does not offer short-term fixes for long-term problems." (139)  It is the economists position to speak truth, and the truth is that public policy should be about creating conditions conducive to long term economic growth.  We must not sacrifice long term economic growth and generalized prosperity for short-term relief from economic disturnbances.  Business fluctations are indeed the cause of needless suffering, but minimzing the damage caused by them is a function of the establishment of a constitutional order that minimizes the Big Player and regime uncertainty effects -- in short, that minimizes the chances that Keynesian policies can create a Keynesian economy.

Unfortunately, as Koppl demonstrates, the policy steps taken since 2008 are not along these lines, but instead ones that exacerbate Big Player and regime uncertainty effects, such as TARP, QE and Dodd-Frank.  What is required is a "rule of law" approach to macroeconomics as argued by Hayek and more recently Larry White.

Koppl's work demonstrates not only the analytical power of the contemporary Austrian approach to economics, but its practical relevance to the world of public policy.   It really is brilliant.

 

Comments

[Andy]

Hi Peter, are you still in SP? If you want to get a coffee or beer sometime, let me know!