Sunday, 4 October 2009

Hey Austrians - where are the numbers?

Greg Ransom comments on Marginal Revolution today that we have:
...a Hayekian artificial boom and inevitable bust with a very, very slight secondary deflation, and non-market clearing price controls on entry level labor.
This is a reasonable summary of the Hayekian story, for which Greg consistently argues on my three favourite libertarian/monetarist blogs: MR, TheMoneyIllusion and Worthwhile Canadian Initiative.

The idea is that easy money leads to overinvestment in certain sectors, which end up consuming more resources than their stable long-term share of the economy. Housing being the key example in the 2001-07 boom, or Internet technology in the previous one.

When something goes wrong, the availability of capital rapidly shrinks and there's no more money to spend on all those houses in Nevada or foosball tables in San Francisco. Lots of housebuilders or programmers are thrown out of work and need to learn a new trade.

In this story, government stimulus just delays the inevitable transition of people and other resources from sectors which no longer add much value to those where they can be more productive. Therefore, not only is stimulus expensive but it acts as a brake on recovery and future economic growth. So do labour market regulations such as the minimum wage.

One appeal of this explanation is that it works reasonably well whether the boom is fuelled by credit (this time) or equity (last time). And it does seem intuitively right that there have been more people working in construction than is sensible.

But it does leave some key gaps.

First, why should easy money go into these sectors particularly? If money is cheap, why do people systematically spend it on houses or pets.com shares? Why don't they buy more cars, holidays or gold? Is there a behavioural tendency to spend on some things and not others, and if so why?

Second and more importantly, this reallocation process is going on all the time, even when there is a boom. During the last 15-20 years the number of Internet software developers has consistently increased, even with a small slowdown in 2001-2. Fewer people work as secretaries and more work as reiki trainers (many of them are even the same people). So what is the difference now, and why will a stimulus package stop it from happening?

In short: what are the numbers? What is the natural, sustainable rate of reallocation of people between sectors; how fast was it happening over the last six years, how fast is it now, and how fast should it be for optimal recovery and growth?

Keynesian and monetary macroeconomics, whatever their weaknesses, at least provide empirical data to support their hypotheses and calibrate the theories. Austrian economics, despite its useful insights, doesn't seem to bring any testability with it.

Austrians - please give me some data and prove me wrong.

5 comments:

PunditusMaximus said...

How is a nontestable worldview different from a religion?

Lucas said...

My response:

http://engelhardtlm1.livejournal.com/200251.html

Naturally, feel free to comment.

nates said...

Why did it go into houses? Fannie Mae? Freddie Mac?

Why does the stimulus stop it? It doesn't.

You want your data, look at 1921. No govt spending, rapid reallocation.

Julien Couvreur said...

"In short: what are the numbers? What is the natural, sustainable rate of reallocation of people between sectors; how fast was it happening over the last six years, how fast is it now, and how fast should it be for optimal recovery and growth?"

The question, unfortunately, only makes sense to a neoclassical economist. It presumes that sectors can be defined. Then it presumes that there is such a thing as a constant in economics and human behavior.

Such numbers could certainly be measured (with caveats), but it would tell you very little.
Would you expect that number to be applicable to other cities, countries, or maybe in 10 years or after some new development?
How do you support any such expectation?

That said, this is not to say that numbers are disregarded by Austrians, just that their use of numbers is full of caution and they have a keen understanding of the fundamental limitations of metrics in human matters.

Julien Couvreur said...

PunditusMaximus, feel free to try and disprove any portion of the Austrian theory using empirical evidence and testing.
Austrians do not preclude you from trying.

Please go ahead and publish an empirical paper proving that minimum wages actually raise employment and wealth (for example). Austrians will certainly care to respond to your irrefutable invalidation.