Horwitz on Austrian Economics

The video that I critique can be found here: http://www.youtube.com/watch?v=SxWlD-feIZU

I just finished watching Steven Horwitz’s video and I thought I would make a couple of comments.  For those that don’t know, Horwitz is one of the leading Austrian economists and author of the book, “Microfoundations and Macroeconomics: An Austrian Perspective.” 

At 3:28 Horwitz claims that “We know that people react in predictable kinds of ways.  We know that if you try to prevent prices from moving to their market clearing levels, it will mess up people’s ability to figure out what people want and how to produce it most efficiency.”  However, as I’ve already shown, prices are administered and there is absolutely no mechanism toward market clearing.  If this is true, then according to Horwitz, the free market does not have the “ability to figure out what people want” nor does the market have the ability to produce commodities most efficiently.  I would also add that without market clearing, high unemployment could be a rule rather than the exception. 

The 4:10, the interviewer claims that Ludgwig von Mises predicted the fall of the Soviet economy in 1921.  If you are familiar with Austrian propaganda, you’ll have noticed that Austrians have claimed to have predicted all sorts of events in the past.  On closer inspection, you’ll find that most of the predictions are highly exaggerated, made-up, just wrong, or that a number of other people made similar predictions.  In this case, Mises predicted that the Soviet economy would collapse because the price system was administered by a central authority. First off, Mises made his prediction in 1921 but the Soviet Union didn’t fall until 70 years later!  If this is the case, I’m going to go out on a limb here and claim that we’ll have another stock market crash and North Korea is going to fall in the next 70 years.  Secondly, the Soviet Union didn’t fall because prices came from a central authority.  Mises was just plain wrong.  If we are going to play this game, we can say that Bakunin predicted that State Socialism would lead to a Red Bureaucracy.  At least Bakunin’s theory actually came true.  Third, there were a number of other people to claim the Soviet Union would fall including a number of socialists.  Horwitz agrees with the interviewer that Mises predicted the fall but then goes on to claim that Hayek (at 4:40) also claimed the fall of the Soviet Union.  However, neither Hayek nor Mises predicted why the Soviet would collapse.  The reasons for the Soviet collapse are extremely complex and the pricing system played a very minor role if any. 

At 7:24 Horwitz makes the outrageous claim that before 1913, the banking system in the US was fairly stable but then goes on to claim that the banking system during this time was “under significant regulation”.  So which is it?  At 7:53, Horwitz claims that Canada didn’t have the same problems of the US banking system but he fails to mention that the Bank of Montreal acted as a central bank during this time.  Even by 1866, western banks were alarmed by the growing power of the Bank of Montreal. 

At 8:04 Horwitz claims that “We know from the history of money that money itself grew not from kings declaring something money or someone investing money but through an evolutionary process that grew from barter into indirect exchange and gave us the things we call money.”  This is a complete myth that by now has been completely decimated by empirical evidence.  As David Graber states, “In fact, our standard account of monetary history is precisely backwards. We did not begin with barter, discover money, and then eventually develop credit systems. It happened precisely the other way around.”  In fact, it was states that created money which is now supported by a ton of historical and anthropological evidence.  As of yet, there is nothing to support the Austrian claim that money evolved from barter.

At 12:20 Horwitz claims that for a long time the Austrians have claimed that the Central Bank is the source of instability as though this is some original claim.  In reality, the claim is pretty much a common view among Keynesians, New Classicals, and a number of other schools of thought.  In fact, the first person to spot the housing crisis was Dean Baker who is a New Keynesian.  He claims that Alan Greenspan is the most responsible for keeping the interest rate too low for far too long.  However, I’m going to disagree with the above.  It is not the fault of the Fed but the banks themselves.  The job of the bank is to supply customers and those customers demand money.  It is vital to remember that banks are in the business to maximize profits just like any other company.  Home builders had unrealistic expectations about future profits and the banks were caught up in the same unrealistic expectations.  There is no reason to think that banks wouldn’t have been caught up in the same herd mentality, especially when everyone was making massive amounts of money.  In fact, in 2006 Moody’s assessed that the major problem with Freddie Mac was the fact that they wouldn’t engage in riskier loans.  After this assessment, Freddie Mac changed strategies because they were losing market share.  In other words, even a partially privatized Freddie Mac had a lot of internal pressure to compete with the market system to give out bad loans.  Without participating in giving out loans, banks risked hostile takeover by larger banks.  And this is exactly what happened.  Anyway, I’ll expand on this in another article because it requires a lot more information but one can see that empirical evidence points toward endogenous money

Austrians try to claim that the Central Bank is the main cause of inflation but there are a number of reasons for inflation such as increased employment, increase or decreases in the velocity of money, cheaper imports, movement in exchange rates, less bank credits, and falling commodity prices due to increased production.  At 14:00, I agree with Horwitz that if we look at the history of anti-trust laws that we actually find that it was big business who facilitated creating these regulations to dominate their competitors and that this practice continues to this day. 

At 18:10, Horwitz says that if states can’t plan their own economies, how could states possibly conquer other countries and plan their economies.  This is supposed to be an anti-imperialist view and I commend Horwitz for such a view.  However, states have and do conquer other countries and plan their economies.  Iraq is a perfect example.  It takes something as large as a state to conquer another country and employ a number of laws to enforce capitalism and the “free” markets.  Capitalism and “free” markets have spread around the world and it wasn’t voluntarily created by states or individuals.  Even assuming we remove this argument, why wouldn’t companies in our hypothetical libertarian society go to other countries and use foreign governments to distort markets in their favor?  That’s what private companies do today.  States are great for big companies as even Horwitz admits.  Therefore, this just seems to be another internal flaw of capitalism.  It basically incentivizes despotic behavior. 

At 19:20 Horwitz says we should open education to competition before eliminating government education all together.  Now, I’m all for getting rid of the public educational system but this idea that everyone will be able to afford it seems to be a major stretch.  I have two kids and I can tell you that child care is massively expensive.  In fact, it’s so expensive I’m a stay-at-home dad because it’s almost cheaper.  The ability for people to send their children to school these days requires pooling of the resources of the community.  A poor family or a single parent is not going to be able to afford such costs.  Furthermore, rich families are going to be able to send their kids to the best schools while poor families will get an inadequate education.  Therefore, we are just reproducing the same circumstances of today, tomorrow.  Furthermore, the market will shape the educational system.  The educational system supplies workers because capitalists have a demand for them.  Just like today’s education, you can expect to see the “best” educators will breed obedient students who can’t critically think about the world. 

At 19:40 Horwitz suggests that we should start moving from social security to something like IRAs and 401ks.  This would just be a Wall Street bailout and would allow speculators to gamble with people’s retirement money.  Even more problematic is the fact that we have been moving from a productive economy – one that actually makes things – to a financial economy where nothing is produced.  For instance, a bunch of speculators trying to guess how much Twitter is worth doesn’t produce anything. 

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But a much worthwhile question is: how isn’t this like the way Austrian’s claim the Federal Reserve works?  How wouldn’t this just inflate the economy on speculative assets?  At this point, our entire economy is resting on financial markets which are speculative in nature.  Basically, nothing is holding up the economy. 

At 21:05 Horwitz says that government programs have crowed out churches, synagogues, friendly societies, etc. which used to provide these services.  However he fails to mention that the standard of living has significantly increased and that when we refer to the services required, such as medicine, costs have skyrocketed.  Churches and friendly societies would have an extremely hard time providing even basic things such as blood, medicines, and medical equipment without going immediately bankrupt.  Horwitz claims that once we pull back on things like education and health, these groups will reemerge.  But why don’t we have them today especially when there is such as massive deficit.  For instance, why don’t we have a number of churches and friendly societies providing healthcare to the millions of people who don’t have it? And if we still have a major problem with homelessness which Horwitz says that government isn’t solving, then where are all these groups?

Horwitz at 22:21claims that Estonia is a success story but fails to mention the massive emigration nor does he mention the fact that Estonia has increased government spending. 

There was a lot more stuff to disagree with but that covers the majority of the interview.  

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