Friday, May 25, 2012

"Lord Keynes" — Austrians Can’t Get their Story Straight on the Effects of Austerity

Here is something I have noticed of late in the ongoing debates on austerity: some Austrians argue that fiscal contraction can directly lead to GDP growth and recovery (a line taken by some neoclassical economists with their pro-growth austerity fables), and they argue that, if only governments would do nothing and pursue austerity, strong recoveries would ensue. In the process, these Austrians seem to deny that recession or depression is the result of fiscal contraction.

The idea is blatantly contradicted by their own business cycle theory, which holds that prolongation of a recession or depression to its “natural” end, and purging malinvestments in the process, is a necessary consequence of the “do nothing” response itself (called “liquidationism”). Therefore it is bizarre and stupid in the extreme for any Austrian adherent of the Hayekian business cycle theory to argue that austerity or a “do nothing” policy will lead directly to growth.

Before he renounced liquidationism, Hayek inPrices and Production explained exactly why nothing must be done during a credit-caused recession, and why the economy and society must suffer the consequences:
Read the rest at Social Democracy for the 21st Century
Austrians Can’t Get their Story Straight on the Effects of Austerity
by Lord Keynes


Clonal said...

Oxfam just published a downloadable book "Be Outraged"- review here

Book here (pdf)

is week Oxfam supported the publication of ‘Be Outraged’, an angry and eloquent broadside from some big names in the development magnificent-sevenscene, including Richard Jolly, Carlos Fortin, Giovanni Andrea Cornia, Diane Elson, Ruth Pearson, Frances Stewart and Stephany Griffith Jones. Many of them led the fightback in the late 1980s against the excesses of the Washington Consensus, working out of UNICEF and producing the hugely influential critique, Adjustment with a Human Face. A generation later, they’re back, vaguely reminiscent of a more gender-balanced version of the Magnificent Seven – battle-weary gunslingers returning for one last shoot-out (over to you, photoshoppers – Richard Jolly as Yul Brynner has to be worth a go).

The targets of their wrath are the TINA Austerians – ‘there is no alternative to austerity’. They critique each aspect of the austerity agenda, then contrast it with inspirational examples of more constructive approaches. Here are some highlights:

“Pushed to extremes, austerity is bad economics, bad arithmetic, and ignores the lessons of history. We, an international group of economists and social scientists, are outraged at the narrow range of austerity policies which are bringing so many people around the world to their knees, especially in Europe. Austerity and cutbacks are reducing growth and worsening poverty. In our professional opinions, there are alternatives – for Britain, Europe and all countries that currently imagine that government cutbacks are the only way out of debt.

Clonal said...

The above review is by Duncan Green, the Head of Research for Oxfam GB, who blogs at "From Poverty to Power"

Tom Hickey said...

Thanks, Clonal. Promoted.

googleheim said...

The real question is if Austrians acknowledge that the derivative vortex machine in Wall street should be purged first since the "liar loan" and the foreclosure market in it's entirety was only a $450 billion fiasco that could have been mopped up with standard elastic currency operations such as the RTC savings n loan clean up.

The malinvestments were not the homes that gave people a place to live, but the debt sellers who chopped and spammed mortgages into all sorts of mad cow pate'.

Would Austrianism end of cycle times scenario clean up the derivative debt markets ?

No, it enriches the top managers with rewards for cutting jobs and gutting assets in the form of creative destruction.

Tom Hickey said...

@ googleheim

IN their favor, Austrian economists recognize the role of credit in an economy, although they look at it somwhat differently from Minsky and Minskians. This is why Austrian Mish Shedlock can support Post Keynesian Circuitist Steve Keen.

Although both see the problem as loose credit, the solutions are substantially different. Austrians are essentially of the view that credit has be to restricted not by regulation but by "sound money," full reserve banking and market set intrest rates in order to obviate malinvestment, whereas institutionalists see the problem as involving lax credit extension due to institutional arrangements and cheating, which they think can't be completely eliminated but can be shored up considerably