Monday, January 03, 2011

Those Danged Austrian Economists

When one reflects on the history of Austrian economics, one can't help but think of the story of the early Church. The unorthodox school was started in the late nineteenth century Austria—though its adherents claim that some of its insights were appreciated long before by the Spanish scholastics. Carl Menger and Eugen von Böhm-Bawerk provided the material for the later synthesis by Ludwig von Mises; Nobel laureate Friedrich Hayek was also a member of the school. During this first wave, the Austrians were taken quite seriously, but their popularity waned as defense of the free market fell out of favor. Mises, who was Jewish, was compelled to leave, first Austria, then Switzerland, making his way to the United States. There he reworked his opus, publishing Human Action to little fanfare in 1949.

It would be a misnomer to insist that things looked grim for the Austrian school, because there was no school at this time: it was just Mises. But the last knight of liberalism managed to secure a job teaching at NYU through the Volker fund. The disciples he gathered there were able to ensure that his system would not be regulated to the dustbin of history. Today, the Ludwig von Mises Institute provides articles, books and courses furthering the cause of the Austrian school of economics. Thanks to the advocacy of congressman Ron Paul, the teachings of this school are reaching a large audience.

Enter Christopher Ferrara with his book, The Church and the Libertarian, in which he seeks to combat the errors of the Austrians, be they economic or ethical. He also provides a defense of Church teaching, utilizing various encyclicals from Rerum Novarum through Caritas in Veritate. This Ferrara does exceedingly well. His attempts to correct the errors of the Austrians, however, are less successful—though here, too, he makes some valid points.

To understand Ferrara's criticism, we have to know a bit more about the Austrians and their system of economics. They insist that economics is an a priori science, deducible from some basic axioms about man, most importantly that humans act to satisfy wants with scarce means. An entire corpus of thought has emerged from the careful deduction of Mises and his disciples. However, because the science is a priori, it cannot be disproved by empirical evidence; the Austrians insist that any criticisms must be leveled at the theoretical edifice they have erected.

One of the staples of Misesian thought is that, in economics, value is subjective. When I exchange my money for a beer, I do so, not because the beer's value is equal to the money I hand over, but because I value the beer more than the money; contrariwise, the bar values my money more than the beer. It follows that any non-coercive exchange is mutually beneficial; despite their supposed value neutrality, there is a clear preference for allowing such exchanges to take place by Austrian adherents. One of Ferrara's better criticisms is that, since man must work in order to live, he may be compelled to work for a pittance, even if the wage is far from just. In other words, compulsion might not always come from the State.

Mises most famous—or infamous—disciple, was Murray Rothbard, who took the Misesian approach further than the master himself, waxing eloquently in defense of anarcho-capitalism. Rothbard makes use of the natural law tradition, and thus has a certain appeal for Catholics—or, at least, Thomists. However, he reinterprets the right to property, conditional for St. Thomas (Summa Theologica II-II, Q66, A7) as an absolute right. Rothbard was no doubt concerned that a conditional right to property would allow statism to sneak in the back door. Yet he forgets that the right to property stems from the right to life, without which it is bereft of meaning. Moreover, as Ferrara points out, Rothbard's conception of rights fails to consider the duties incumbent upon us in the exercise of these rights: "Gone are the first precept of the natural law—to do good and to avoid evil—along with the Ten Commandments." Rothbard's curious interpretation leads him to some equally curious conclusions, as that a pregnant woman has no obligation to her child, born or unborn. Such teachings should be intolerable to Christians everywhere.

If Ferrara is sound in his criticisms of Austrian ethics—he similarly disposes of Mises's utilitarianism—he seems to have failed to grok some essential components of Austrian economics. It does not follow that, because the school has made errors, none of its teachings can be of use to the Church. Yet that is the impression one gets in reading some of the strange, and incorrect, categorizations of Austrian tenants.

For instance, the Austrians teach that preferences can be ranked on ordinal scales. As such, any statements we make about preferences will be qualitative, not quantitative. Presently, I prefer writing this review to, say, reading Chesterton. This does not mean that my preference for writing as against reading Chesterton has some sort of mathematical ratio, only that the former exceeds the latter. Attempting to comment on this, Ferrara writes: "The attempt to create a ordinal rankings in such cases produces complex set operations expressed in mathematical symbols, charts ranking all possible combinations of goods and the needs they satisfy in order of preference, and Venn diagrams expressing the "set difference" between subsets of wants." One wonders whether Ferrara managed to read any Austrian economics at all. Perhaps the definitive characteristics of Human Action is the total absence of either equations or graphs in a nine-hundred page economic treatise. Criticizing the Austrians for bringing mathematics into the matter would be like chiding Keynes for too much clarity in his General Theory. In fact, it is precisely because of the inability to extract equalities from subjective scales of utility that Mises argued that economic calculation in a socialist commonwealth would be fundamentally impossible.

Ferrara similarly stumbles in his critique of Austrian business cycle theory. For those inclined, the best explanation comes from Rothbard's America's Great Depression, available at the Mises website. Briefly, the combination of an inflationary central bank and the system of fractional reserve banking allows money to flow into the economy. Entrepreneurs mistake this for an increase in real wealth, and a cluster of business errors manifests itself in a particular sector of the economy—thus we had a housing boom, especially in cities such as Las Vegas. When the central bank tightens the money spigot, the entrepreneurs realize that they have made mistakes; resources have been misallocated, and the economy must rebalance itself—housing prices must fall and those employed building houses must find other jobs. Ferrara insists that greed alone was sufficient to cause the housing bubble, forgetting that the money needed to originate somewhere in order to drive prices up to bubble levels.

Undoubtedly there was much greed in certain sector of the economy; but there was greed in other non-bubble sectors, too, so greed alone cannot be sufficient cause. Moreover, not everyone who bought a house at bubble prices was greedy; the pernicious effects of Federal Reserve policy wrought destruction even on honest entrepreneurs and consumers. It's difficult to insist that Austrian teaching was not thoroughly vindicated by the latest crisis. Moreover, since the entire system of fractional reserve banking is inherently fraudulent, and therefore immoral, one would think an orthodox Catholic would see the Austrians as allies, at least on this point.

One last caveat: at times, Ferrara's categorization of the Austrians borders on caricature. He writes: "Nowhere, however, does one find an Austrian recognition of the intrinsic affinities of Big Business, Big Government and Big Finance." Yet, as the man he denigrates as Pope Murray I writes in For a New Liberty: "Big business support for the Corporate Welfare-Warfare State is so blatant and so far-ranging, on all levels from the local to the federal, that even many conservatives have had to acknowledge it, at least to some extent." The Austrian emphasizes reducing the scope of Big Government not necessarily because he is insensible to the abuses of Big Business, but because he believes that removing Big Government support would render those abuses negligible.

Ferrara's righteous indignation prevents him from seeing that which is good in the teaching that so upsets him. The Austrians are quite sound on money, and there is nothing in business cycle theory that necessitates condemnation by the Magisterium. This mars the quality of his book. Yet there is undeniably much good that remains. His demolition of Rothbard's system of ethics is total, and he offers a thorough defense of Catholic social teaching, as well as some non-political steps toward reform. His book is a must for anyone, Catholic or otherwise, who has fallen under the influence of Mises and his followers.

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