Archive for 7 October 2008
Mundane Austrian Economics
| Peter Klein |
The “Austrian” school of economics gets frequent mention on this blog. It even comes up in mainstream discussions of the financial crisis. But what exactly is it? Why do I care so much about the economy of Austria (or, I’m sometimes asked, Australia)?
The label “Austrian” describes a particular tradition in economic analysis, one that dates back to Viennese economist Carl Menger’s 1871 Principles of Economics (hence the geographic identifier). The Austrian approach is usually associated, particularly in applied fields like organization and strategy, with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory of entrepreneurial discovery, and an emphasis on time, subjectivity, process, and disequilibrium. Even Lachmann’s “radical subjectivism” is getting some play. Various Fosses and Kleins have also argued that Austrian capital theory has some implications for entrepreneurship.
Despite this renewed interest in the Mengerian tradition, the Austrian approach to “basic” economic analysis — value, production, exchange, price, money, capital, and intervention — hasn’t gotten much attention at all. Indeed, it’s widely believed that the Austrian approach to mundane topics such as factor productivity, the substitution effect of a price change, the effects of rent control or the minimum wage, etc. is basically the same as the mainstream approach, just without math or with a few buzzwords about “subjectivism” or the “market process” thrown in. Even many contemporary Austrians hold this view.
In a new paper, “The Mundane Economics of the Austrian School,” I suggest instead that the Austrians offer a distinct and valuable approach to basic economic questions, an approach that should be central to research by Austrians on theoretical and applied topics in economics and business administration. (more…)
Revenge of the Aggregates
| Peter Klein |
I first studied macroeconomics back in the dark days before the microfoundations revolution had filtered down into the undergraduate curriculum. We learned Y = C + I + G and that was about it. Fluctuations in aggregate demand cause fluctuations in aggregate output, Hayek be damned. Relative price changes — between markets at the same place in the time-structure of production, or between higher- and lower-order sectors — were completely ignored.
Supposedly mainstream macroeconomics has moved beyond this crude level of aggregation. But you’d never know if from the discussions of the last few weeks. “Banks” aren’t “lending” enough. “Businesses” and “consumers” can’t get “loans.” “Firms” have too many “bad assets” on their books. The key question, though, is which ones? Which banks aren’t lending to which customers? Which firms have made poor investments? Newsflash: a loan isn’t a loan isn’t a loan. I hate to break it to the Chattering Class, but not every borrower should get a loan. The relevant question, in analyzing the current mess, is which loans aren’t being made, to whom, and why? The critical issues revolve around the composition of lending, not the aggregate amount. Focusing on total lending, total liquidity, average equity prices, and the like merely obscures the key questions about how resources are being allocated across sectors, firms, and individuals, whether bad investments are being liquidated, and so on. (more…)
Organizations and Markets 
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