February 2012

In a New York Times article this month about Ron Paul, the libertarian candidate in the Republican presidential primaries, the following statement appeared: “It was ‘The Road to Serfdom’ by Friedrich Hayek that became the ur-text of Mr. Paul’s emerging ideology, introducing him to Austrian economics and its Manichaean choice between laissez-faire capitalism and a government-run economy destined for disaster. (Mainstream economists have long dismissed the Austrian school, but it retains a devoted following among libertarians and some conservatives.)” This provoked my thinking about what ‘mainstream economics’ was. To begin with, Hayek did not write in Manichaean terms. He saw a significant role for central government, and was far from believing that there was a simple choice between the Good of private enterprise and the Evil of statist control of economic resources. On the other hand, the Times’s notion of ‘mainstream’ anything is notoriously left of center, and I imagined that the reporter was probably taking his cue from the newspaper’s eccentric but highly self-regarding columnist, Paul Krugman. Krugman, who expresses a constant nostalgia for Roosevelt and the New Deal, regularly promotes and classifies as ‘Keynesian’ the very unKeynesian notion of adding to a deficit of $16 billion in order to defy ‘austerity’ and encourage consumer spending. Moreover, the Times’Public Editor, Arthur S. Brisbane, has had to respond to critics of the paper who (rightly) accused it of not giving enough attention to Ron Paul in its coverage of the Republican candidates. Richard Stevenson, the Times’ political editor, rather sniffily told Mr. Brisbane in December: “Not all candidates are created equal. We do not feel compelled to treat every candidate with the same intensity or seriousness as we do others.”  Ron Paul is clearly not ‘mainstream’ enough in the Times’s eyes: it has essentially prejudged the candidates on behalf of its readers.

But there is another culprit – Wikipedia. Its entry for ‘the Austrian School’ states: “The Austrian School’s views are outside of mainstream economics, and mainstream economists are generally critical of their methodology”. In the entry for Mainstream Economics, the author explains that “Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities”, and that “the term came into common use in the late 20th century. It appears in the seminal textbook Economics of 1948, by Samuelson and Nordhaus.” Furthermore, “present-day mainstream economics stems from the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics”. Mainstream economics is thus the comfortable theory of current dominant and influential economists, no matter how questionable their opinions might be. Anyone who ventures to question their orthodoxies should be wary.

Well might the Austrian school challenge these ‘truths’. These are the truths of the liberal consensus – belief in large, activist government and an expensive welfare state, a suspicion of markets and the individual decisions that drive them, too vigorous a reliance on mathematical models  that have no relevance in a global economy, and a blind trust in the availability of wealth to fund their programs that would make Ayn Rand cringe. All in all this is the socialism of the 21st century that self-confidently and smugly points out that ‘capitalism doesn’t work’. But capitalism is not really an ism:  it has no ideology, is not a ‘system’. Certainly it is not a system of government – a categorization mistake made continually by professional historians who ought to know better, when they compare the Western democracies to totalitarian states. And it is of course essentially unstable, subject to creative destruction. It fails to ‘work’ only in the sense that those who practise it cannot predictably provide enough wealth (or employment) to satisfy the hungers of their respective governments. Today’s crises of national budget deficits in the Western democracies are characterized by bloated government bureaucracies (including such phenomena as ‘government jobs for life’ in Greece, and inflation-proof pensions); out-of-control entitlements, with career politicians handing out other people’s money to those who placed them in power, or as aid out of some earnest moral conviction; attempts to stabilize ‘systems’ that are essentially disorderly, accompanied by misguided regulation and inappropriate interference in markets, all frequently abetted by ‘crony’ relationships between public and private sectors. In Europe, of course, such phenomena are intensified by quixotic strivings for economic union without political integration. But wealth is not something waiting to be re-distributed: it has to be re-created every year, every week, and every day. And the main creators of the wealth that these countries want to distribute or consume are now to be found overseas. When the history of the crisis of the early part of this century comes to be written it will not be of the failure of capitalism and the Austrian school, but of leftist welfarism, romantic aspirations for European unity, and ‘mainstream’ economic thinking.                                                                                                                                                                                                   (February 29, 2012)

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