Ernst] Troeltsch distinguished between church, sect, and mysticism as
primary types of religious life. The church is more peremptorily
inclusive and achieves greater accommodation to worldly institutions.
The sect demands voluntary commitment from its members, is more
perfectionistic in its aims, and often adopts a critical stance toward
existing social arrangements..." -- Donald A. Nielsen
I recently took the long form of the Are You an Austrian?
quiz, which is about whether I agree with economists like Ludwig von
Mises and Friedrich Hayek, not about whether I have the same country of
origin as the new governor of California. I scored a 78.
I would have scored higher had I been trying to answer according to what I understand the Austrian School
to believe. There were only one or two questions where I was a little
unsure, and depending on how well I guessed on those I would have
gotten somewhere between 90 and 100.
The reason that I only scored a 78 is that I took the title of the quiz literally ("are you an Austrian"), so I answered with my own beliefs, knowing that they diverged in some cases with the Austrian School.
For example, I subscribe to the quaint notion of national defense. When
tyrants and would-be tyrants ask about our President, as Stalin once
asked Churchill about the Pope, "How many divisions does he have?" I
would like the answer to be "more than enough to smash you!" The Austrian School thinks that you do not need a government to provide national defense. The Mises.org weblog is as eager as any Dean Democrat to see the U.S. fail in Iraq.
found it interesting that the "Are you an Austrian?" quiz does not
distinguish between knowledge of doctrine and belief in doctrine. To
me, this is symptomatic of a sect, which focuses on doctrinal purity
above all else. For a sect, to know is to believe, and to believe is to
church, in contrast, tries to be as inclusive as possible. You can be a
member of a church if you only subscribe to some of its beliefs, but
not all of them.
The Features of Austrianism
The Austrian School
offers a perspective on property rights, markets, and economic growth
which I find highly congenial. It emphasizes the incomplete information
that any individual or organization has. It says that private ownership
of property and free markets allow the sort of trial and error to take
place that enables learning and economic growth. As businesses compete,
efficient technologies survive and inefficient processes fall away.
by the economist Deborah Walker traces the origins of Austrian
economics to 1871, and points out that the major works of Mises and
Hayek were written from the 1920's to the 1940's. However, in today's
information age, if the Austrian school did not exist it would have
been invented. With our economy dominated by competitive innovation, in
computers and consumer electronics, biotechnology and medicine, and
other fields, the impossibility of central planning seems evident.
Today, John Kenneth Galbraith's claim in his 1967 masterwork New Industrial State
that "The modern large corporation and the modern apparatus of
socialist planning are variant accommodations to the same need" sounds
as though it could be the beginning of an indictment of large corporate
dinosaurs, with an inability to tolerate decentralized innovation. For
Galbraith, of course, it meant the opposite -- he was arguing for the
inevitability of the convergence of socialism and capitalism.
of what I believe about economics is based on the concept of imperfect
knowledge. Imperfect knowledge implies that as we gain knowledge, our
standard of living improves. However, we still have much to learn. We
know how to treat strep throat, but we do not have a cure for cancer.
As a process
for learning, free markets and private property are extremely valuable.
The market system provides an incentive to experiment and to adopt
successful experiments. To me, this core insight is the key
contribution of Austrian economics.
The Bugs of Austrianism
Given that Austrian economics focuses on The Knowledge Problem and Competition as a Discovery Procedure,
which of the following would you guess would be a metaphor for an
Austrian explanation of booms and busts in business investment?
Imagine a restaurant in which the menu includes some items that can be
cooked quickly, using stir-fry and microwave techniques, while other
dishes such as stews and roasts require longer and more roundabout
cooking methods. In a well-functioning restaurant, the extent to which
consumers are hungry now or are willing to wait determines the mix of
food that is prepared. The waiters deliver the right information to the
chefs about how much of each type of meal to prepare. However, like a
bad waiter, a central bank can enter the picture and deceive the chefs
into thinking that people want more stews and roasts than they truly
desire. This leads to a boom in long-term cooking, followed by a bust
Imagine a restaurant in which the chefs have many new recipes to try.
Most of them will not be popular, but some will represent successful
gastronomic progress. When the chefs become optimistic, they try many
new recipes, which means a boom. When the chefs become risk-averse,
there is a slump.
reasons that baffle me, the Austrians prefer explanation (A).
Explanation (B) is closer in spirit to Keynes, the arch-enemy of the
experience both in business and in economics leads me to prefer (B). I
have never been in a business situation where a decision boiled down to
a choice between two projects with known, predictable rates of return,
with one project short-term and the other project long-term. Instead,
the typical challenge has been to guess whether a new business idea
will be successful or not, given uncertainties about feasibility,
marketing, technology risk, and other factors.
an economist, I believe that there are many competing explanations for
booms and busts in business investment. There are too few real data
points to provide conclusive evidence for one of these hypotheses.
However, I saw the Internet Bubble developing, I predicted its demise,
and I predicted its economic consequences, all without ever thinking of
the problem as excess liquidity supplied by the Federal Reserve for
which the Austrians blame the bubble. Today, the Austrians believe that
monetary policy has been too expansionary and that another crash is
imminent. Instead, I believe that monetary policy could have been more
expansionary, and a vibrant economic recovery is under way. Time will tell.
Will Austrianism Survive?
future of Austrianism is uncertain. As a sect, insisting on adherence
to all of its beliefs, the Austrian school will remain a committed but
real need today is for an Austrianism that is more like a church. This
would be a movement of economists that shares many beliefs but differs
on others. I believe that information-age economics with many Austrian
features will emerge. I am not sure whether today's Austrian sect will
be pleased or put off by that result.