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Tamny’s Whammy

Summary:
Thanks to the great John Tamny for shinning a positive light on our current circumstances in “Where Are All the Austrian Scholars’ Yachts?” (RealClearMarkets, April 30). We do share a long-term optimistic view of capitalism, and Ludwig von Mises himself said that access to stock markets and financial markets was a defining characteristic of capitalism! ...

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Thanks to the great John Tamny for shinning a positive light on our current circumstances in “Where Are All the Austrian Scholars’ Yachts?” (RealClearMarkets, April 30). We do share a long-term optimistic view of capitalism, and Ludwig von Mises himself said that access to stock markets and financial markets was a defining characteristic of capitalism! However, central banks and their fiat money, like the Fed and the US dollar, are definitely not part of capitalism.

Tamny’s Schumpeterian analysis and pro–free market views, where he sees the current stock market rally taking us back to the top and ever higher, are no doubt calming, if not inspiring to his readers. However, he calls Austrian economists and me in particular to task. In short, if Austrians are so smart, then why aren’t they all rich? And why are they so pessimistic about the current market recovery?

Despite the seeming logic of the market’s rally, it’s difficult for some analysts to ever ascribe progress, or future progress, to stock-market health. Those most skeptical tend to be part of the Austrian School.

In particular he highlights my most recent book The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century. The second half of the book documents that some Austrian economists have foretold the major economic crises of the last one hundred years and that leading mainstream economists got it wrong, often dead wrong. Tamny insinuates that Austrians have some kind of magical crystal ball:

Mark Thornton is one of those Austrian skeptics. A senior fellow at the excellent Mises Institute, Thornton has claimed that Austrians like him have predicted every contraction and meltdown of the last 100+ years. Thornton doesn’t really mean that. He’s too smart. If Austrians could actually see around the corner as they contend, they’d all be driving Ferraris and trading stocks on massive yachts.

I certainly do not believe that Austrians have some kind of magic ball. However, I just published an article on this crisis which shows that the virus merely triggered what would eventually happen, an economic crisis, and that the shutdown will make it worse. There are several factors which make turning Austrian theory into yachts highly problematic.

The well-known caveats to Austrian business cycle theory are: 1. We do not believe that economists can “predict” economic events in the technical sense of the physical sciences. Tamny’s example of a low price ceiling on apartments harming the supply of apartments is referred to by Austrians as “pattern prediction,” but these types of predictions are subject to the following two caveats. 2. We know little about the timing of an economic crisis despite having a pretty good track record collectively. 3. We also do not have anything approaching a way of measuring the magnitude of a crisis, particularly when much of the damage in some crises is the result of the government’s and the central bank’s responses to the initial crisis. John mentions Japan after 1989 and the US after 2008 as good examples of this, but you could easily add the US after 1929 (See Murray N. Rothbard’s America Great Depression).

Compare that to the depression of 1920–21. The economy crashed badly, the government and Fed did nothing, and the economy recovered very quickly. History books have forgotten all about it.

We agree that the Fed cannot print new resources. However, Austrian business cycle theory highlights the fact that the Fed’s artificially low interest policy distorts entrepreneurs’ investment decisions towards longer-term projects that are eventually revealed to be bad investments. The Fed cannot change the basic amount of land, labor, or capital in the economy. But it can change the supply of credit through its monetary policy’s impact on banks. Distorted decisions are a big part of why firms fail and why the big and mighty become the small and meek, as Tamny so eloquently describes.

Finally, Tamny thinks that the Fed is virtually powerless to impact the economy, another Schumpeterian view. This view is not only at odds with Austrians’, but with those of many schools of economic thought and surely the majority of Wall Street. A good case in point is Tamny’s attempt to create an equation (labelled as Austrian) between interest rates and stock prices: lower rates equals higher stock prices. This is generally the case in normal times, but, of course, other factors and circumstances matter and sometimes dominate. Nothing in the real world is ever so simple, and realizing that is the great strength of the Austrian school.

Let’s hope that Tamny’s optimism is right and Thornton’s pessimism is wrong. After all, the virus and lockdown are special circumstances. However, after a decade of artificially low, near zero interest rates and trillions of dollars of quantitative easing, not to mention negative interest rates, the trillions added to federal debt and even negative interest rates and oil prices would suggest that this is not the moment to go all in.

Mark Thornton
Mark Thornton is Senior Fellow at the Mises Institute. He serves as the Book Review Editor of the Quarterly Journal of Austrian Economics. His publications include The Economics of Prohibition (1991), Tariffs, Blockades, and Inflation: The Economics of the Civil War (2004), The Quotable Mises (2005), The Bastiat Collection (2007), An Essay on Economic Theory (2010), and The Bastiat Reader (2014).

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