The Sorry State of Economic Journalism

8 January 2012 at 12:25 am Peter G. Klein 23 comments

| Peter Klein |

Matthew Yglesias has found a killer argument against the Austrian theory of the business cycle:

[T]he Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out.

I once heard a lecture by the sociologist Steven Goldberg about his work on male social dominance, expressed in his books The Inevitability of Patriarchy (1974) and Why Men Rule (1993). I remember him saying that whenever he presents his dominance thesis, someone invariably raises the objection, with a smug and self-satisfied expression, “What about Indira Gandhi?” or “What about Margaret Thatcher?” He went on (I’m paraphrasing): “Right. . . . Like I’m going to devote three years of my life to researching and writing a book called The Inevitability of Patriarchy, and someone’s going to say ‘What about Indira Gandhi,’ and I’m going to slap my forehead and say, ‘Oh, crap, why I didn’t think of that!'” Goldberg was a funny guy, with a great Brooklyn accent too. (His books point out that Gandhi-led India and Thatcher-led Britain were male-dominated societies, particularly in matters of state.)

This is the centennial year of Mises’s Theory of Money and Credit, published in German in 1912, the book that first presented the “Austrian” theory of business cycles. No doubt Yglesias is unaware that in the hundred years since, there have been dozens of books, hundreds of research papers, more than a few Ph.D. dissertations, and even one Nobel prize analyzing, developing, critiquing, and extending this theory. (Yglesias mistakenly attributes Hayek’s Nobel prize to his work on tacit knowledge, when in fact the prize was given for business-cycle theory.) And yet, these thousands of hours of scholarship can be blithely tossed aside because — wouldn’t you know it — people change their spending habits all the time, and it doesn’t cause a business cycle! Slap to the forehead. Why didn’t we think of that? Curse you, Matt Yglesias!

Of course, Yglesias’s breezy summary of the theory skips over the time structure of production, the difference between consumption and investment, the role of interest rates in securing intertemporal coordination, the problem of expectations, and the other basic elements of the theory, which ten minutes of Wikipedia browsing could have explained. Matt: next time, use the Google! Or ask someone who’s, you know, studied this, and you could have avoided whoppers like: “Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting.”

Yglesias is representative of a new generation of blogger-journalists, such as Megan McArdle, Ezra Klein, and Felix Salmon, who express bold, confident opinions on all issues under the sun, without much substantive knowledge or understanding of any. These writers don’t do a lot of reporting, or investigating, but specialize in editorializing, even in what are ostensibly “news” items. Yglesias, in particular, excels in relationship reporting — which group is connected to which, who dislikes whom, what this person said about that person — but can’t take the time to learn the actual arguments under consideration.

As the wise man says, it ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so.

Entry filed under: - Klein -, Austrian Economics.

Applies to the Professoriate Too Interdisciplinarity Chart of the Day

23 Comments Add your own

1. David Hoopes | 8 January 2012 at 12:46 am

I think you state it just right Peter, “…bold, confident, opinions….without substantive knowledge.” It’s funny that simply being willing to talk a lot qualifies one to talk a lot. I have no clue why anyone listens to your cousin Ezra. He doesn’t seem to know anything. Just very opinionated and cranks out tons of stuff.
2. Peter Klein | 8 January 2012 at 12:52 am

And let’s not even get started on my cousin Naomi!
3. Daniel Kuehn | 8 January 2012 at 7:24 am

I agree that Matt’s post was quite bad, but there’s a grain of truth in the “they realized it didn’t explain the Depression” point, isn’t there?

I mean – there was a move towards guys like Haberler as the Depression wore on. I imagine this is what Yglesias was referring to.

Anyway, I can definitely sympathize with the weariness over people thinking they can shut you down with a dumb criticism you allegedly hadn’t thought of.
4. Peter Klein | 8 January 2012 at 9:56 am

Daniel, I think there’s something to it in the sociological sense, meaning that as the Depression wore on, people became less interested in its root causes, and more interested in getting out of it, by any means possible. Austrian business-cycle theory per se focuses on the boom, not the duration of the bust (for which the Austrians appealed to the standard microeconomic stuff — wage and price rigidity that prevented necessary adjustments, the New Deal, etc. — and more recently, the Higgs idea of regime uncertainty). Hence younger economists (some of them former Hayekians) drifted away from the Austrian theory and became interested in Keynes.
5. Robert | 8 January 2012 at 12:33 pm

According to Austrian school economists (and Joan Robinson), the capital structure, at any given time, is not perfectly adapted to the current pattern of demand. Austrian school economists explain this ill-adaption as the result of (1) Systematic malinvestments resulting (according to an incorrect capital theory) from the monetary authority failing to set the rate of interest equal to some (ill-defined) natural interest rate and (2) Non-systematic mistakes resulting from events not anticipated in past (uncoordinated) plans that the current capital structure embodies.

I have read quite a bit of Austrian-school literature. Yet I don’t know anywhere to find a convincing argument that malinvestments (as in (1)) are more likely than the lack of coordination (as in (2)) to cause business cycles. I don’t even know anywhere to find an argument about the relative quantitative importance of these two causes.

Notice that despite the silliness in Peter Klein’s post, he doesn’t address Yglesias’s objection. By the way, you will find any number of self-identified “Austrians” (at least at his past venue) commenting on Yglesias’s posts. And almost all of these commentators are incompetent and ignorant, including about Austrian-school economists.
6. Juan M | 8 January 2012 at 1:36 pm

intellectual: someone without life experience who talk on matters in wich he lacks competence .

And let’s not even get started on my cousin Naomi? could you have your second cousin as blogging guess?
7. paul | 8 January 2012 at 4:13 pm

but Burton and Richard are pretty good…..
8. TB | 8 January 2012 at 7:42 pm

Brad DeLong has a reply to you:

http://delong.typepad.com/sdj/2012/01/department-of-huh-what-does-peter-klein-think-he-is-doing-edition.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%29
9. Peter Klein | 8 January 2012 at 9:06 pm

I’m honored! But I was hoping for “stupidest person alive,” Brad’s usual honorific.

Um, Kettle, this is Pot calling: http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/press.html

“von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

“von Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital. This type of business cycle theory with links to monetary expansion has fundamental features in common with the postwar monetary discussion.”
10. matt w | 8 January 2012 at 10:19 pm

Has Yglesias’s column been educated since you posted? Because in its current state, its only reference to the Nobel Prize:

“Hayek, who died in 1992, won the Nobel Prize, and mainstream economists thoroughly embraced his important work explicating the role of the price system in conveying information.”

does not say what you say Yglesias says.
11. matt w | 8 January 2012 at 10:20 pm

Gah. “educated” should be “edited.”
12. Peter Klein | 8 January 2012 at 11:25 pm

Hmmm, I don’t remember the exact wording, sorry. It does sound different than when when I read it the first time.

Incidentally, it’s certainly not true that “mainstream economists thoroughly embraced [Hayek’s] important work explicating the role of the price system in conveying information.” Remember those Grossman-Stiglitz papers from the 1980s?
13. Department of "Huh?!": What Does Peter Klein Think He Is Doing Edition | FavStocks | 9 January 2012 at 3:17 am

[…] The Sorry State of Economic Journalism « Organizations and Markets: (Yglesias mistakenly attributes Hayek’s Nobel prize to his work on tacit knowledge, when in fact the prize was given for business-cycle theory.) […]
14. Redmond | 9 January 2012 at 8:26 am

Seems like really lazy blogging as opposed to “journalism” but maybe my standards are too high!

Slate should take its game up a notch.
15. Austrian Economics Hits the Headlines | The Freeman | Ideas On Liberty | 13 January 2012 at 8:08 am

[…] by noting that “[s]pending patterns shift all the time without sparking a recession.” To which, Peter Klein replies, “Of course, Yglesias’s breezy summary of the theory skips over the time structure of […]
16. Austrian Economics Hits the Headlines | The Moral Liberal | 16 January 2012 at 1:21 am

[…] by noting that “[s]pending patterns shift all the time without sparking a recession.” To which, Peter Klein replies, “Of course, Yglesias’s breezy summary of the theory skips over the time structure of […]
17. jason | 17 January 2012 at 1:29 am

Hayek did not win the prize alone. He shared it with Lange. Did Lange share the prize because of his contribution to business cycle theory too?
18. Peter Klein | 17 January 2012 at 1:46 am

Um, Jason, why don’t you just read the press release?

http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/press.html
19. Khornet | 17 January 2012 at 9:17 am

I think he meant “hoard”, to keep a supply of something against expected scarcity, not “horde”, a large number of creatures, especially people. Guy needs an education.
20. spongeworthy | 17 January 2012 at 11:36 am

I can’t say it never happens, but I think you have Megan McArdle mischaracterized. I rarely see her making pronouncements from on-high. She’s kind of known for disclosing her own lack of expertise as well as going out of her way to explain arguments she doesn’t necessarily agree with.

I think she’s getting a bad rap here. But then who am I to say?
21. Mahon | 17 January 2012 at 3:06 pm

Agreed. Megan McArdle is usually pretty clear about what she knows and what she suspects or thinks, and pretty good about fairly stating a position with which she disagrees. She certainly doesn’t belong lumped in with Inglesias or Klein.
22. Mahon | 17 January 2012 at 3:09 pm

Yglesias, of course. Sorry.
23. Peter Klein | 17 January 2012 at 3:26 pm

I am happy to cut Megan some slack (a point emphasized also by Craig Newmark, though my personal experiences have been less positive.