I know, I know: I haven't been terribly kind to Austrian economics on this blog, or rather, I have been positively unkind to certain sorts of Austrian economists, and especially to Late Pleistocene types who insist, on a-priori grounds (and against all sorts of evidence to the contrary) that fractional reserve banking can't work well, or wouldn't survive in a free market, or is inherently fraudulent. But before you scold me again about my bad attitude, try trying to talk some sense into this bunch over a span of several decades, and then see if you're still so inclined.
It's also true that I no longer consider myself an "Austrian" economist, and that I haven't done so for decades. I could list a dozen reasons why, starting with the shivers I get whenever I imagine being mistaken for a Homo-Austriapatheticus*, or some other sort of paleo-Austrian, and my aversion to even the slightest whiff of "enthusiasm," to use that term as Hume did. I'm convinced, furthermore, that the world would be better off if half of everything written containing the phrase "Austrian economics," excepting works pertaining to the history of economic thought, had never been written, and if the rest had omitted the phrase. This last observation isn't really as damning as it seems since, would that I could, I'd consign about two-thirds of all other academic writings on economics to oblivion. Still, I can't blame my Austrian friends for wondering whether I have anything nice to say about their school of thought.
Which brings me to my purpose, which is to put my criticisms of Austrian economics into their proper perspective and, in doing so, to blow a raspberry or two at those other economists who pride themselves in their smug contempt for "Austrian economics," and who, in displaying that contempt, can't be troubled to distinguish the blatherings of the pre-Neolithic crowd from the enduring contributions of the School's leading lights.
I can think of no better way to proceed than to harken back to the time of my own first exposure to those leading lights. It was back in 1980, when I was supposed to be earning a Master's degree in Resource Economics at the University of Rhode Island. I say "supposed to" because, after a few months in that program, I was pretty much fed-up with it. I'd imagined that resource economics, and marine resource economics in particular (which is what URI specialized in) would be a great way to combine my two interests, which were economics and marine biology. Think "Adam Smith with an aqua-lung" and you get the idea. But nothing doing: the economics of the program, far from resembling anything Smith had to say, consisted mainly of one Hamiltonian after another. Nor did I go scuba diving, or head off to sea, as I'd done often enough as an undergrad. Hell, I didn't even get to wade around a friggin' fishpond, as I'd done the summer before in Auburn, Alabama. Instead I diverted myself by swimming a mile or more every morning at Charlestown Beach, and by working my way through the economics section of URI's library.
Actually it wasn't the whole economics section so much as the HG part that held my interest. During 1980, as you may know, the CPI inflation rate reached its highest post-WWII level, just shy of 15 percent, and was seldom below 13 percent. The big economics question was why; and that question concerning what real prices were up to interested me a heckuva lot more than any professorial prattle about "shadow" prices could.
What many of you won't know, unless you were there, is just how bad standard explanations for the inflation were. Keep in mind that for the most part the economics profession back then was still high on Keynesian economics–not the namby-pamby "New" sort taught in many of today's grad programs, but the 200-proof Hansen-Samuelson IS-LM elixir to which Paul Krugman and a few other nostalgics have lately become addicted. And if there's one thing an economist trained in what Axel Leijonhufvud calls the ISLaMic Arts doesn't want to have to deal with, it's pesky questions about movements in the CPI, or any other measure of the price level. You see, the whole wiz-bang apparatus of old-fashioned Keynesian economics is held-together by one carefully-concealed premise: to wit, the premise that the general price level may be regarded, not as a variable, but as a parameter–that is, something given. What's more, that "given" price level is assumed (though no old-fashioned Keynesian would ever admit it, much less express the fact in plain English) to be well above the value that might otherwise clear the market for money balances. Let this little engine of an assumption have its way, and it will handily pull the whole Keynesian freight-train, cute little IS-LM caboose included, along with it. But search every boxcar of that train all you like, the one cargo you will never find is a decent account of how the price level itself is determined, or why it should ever change.
No wonder, then, that the best explanation all those inebriated economists could come up with for the fact that prices were rising faster than ever was that unions or OPEC or both were getting more powerful, and were therefore able to "push" costs up. There was a grain of truth to such theories, of course: costs were going up, along with prices generally; and OPEC had certainly been flexing its muscles. But all the monopoly power in the world couldn't squeeze blood from a stone, or squeeze more and more and yet still more income from a public that had only so much to spend. Something else was enabling the unions and enabling OPEC. Everyone now knows what that was–assuming that Paul Krugman does. But back then very few did.
So there I was, in the stacks at URI, reading book after book in my quest to get to the bottom of the inflation, and finding every last one of them perfectly useless. Then I read Henry Hazlitt's The Inflation Crisis and How to Resolve It, and felt the way Colonel Nicholson must have felt when Colonel Saito finally let him out of his punishment hole–I mean that Hazlitt's bright light almost hurt after so many weeks confined in the dark dungeon of textbook Keynesianism. True, if you read Hazlitt's book today you might find fault with parts of it, as I undoubtedly would as well. But just try reading any of those other books I went through, and you'll agree that they were infinitely worse.
So much for my first, favorable impression of Austrian economics, for although Hazlitt himself was a journalist, he pointed to the Austrian economists as his own guides. I didn't stop with him of course, but kept reading, moving on to more general works on monetary theory, while making a point of including more Austrian works on my reading list. At last I felt ready to tackle von Mises' Theory of Money and Credit, and once again I was struck by how superior it seemed to non-Austrian works covering similar ground. The more I read, the more often I got that same feeling. I don't mean that there were no non-Austrian books that I also liked. I simply mean that the Austrian books I read, mainly by Mises, Böhm-Bawerk, Hayek, and Menger–were always among my favorites. They still are.**
My classroom experience, in the meantime, only served to reinforce my impression that, compared to the Austrian economics I was reading, mainstream economics ca. 1980 was lousy. In one class I remember being confronted by a large IS-LM diagram, made to seem even larger by my habit of sitting in the front row, just opposite the black- (actually green) board. The professor, sticking to the Keynesian script, showed us how, by increasing M, the government could lower i while raising y. (Note that little "y." Without it, IS-LM looses a lot of its mystique.) Up goes my hand–another bad habit. Prof.: "What is it now, Selgin?" Me: "Well, according to this diagram, if we just boost M enough we can borrow for practically nothing, and have all the output we like. So why don't we do that?" Prof. (impatiently): "Well, at some point you get full employment and then things are different." Me: How do we know we aren't at that point already?" Prof. (annoyed): "Well, there are still some unemployed people, aren't there?" Me: "But… " Prof.: "We need to move on."
And on he went. As for me, I was ready to move on as well, though not at URI, and I said as much to another professor with whom I'd originally planned to study. Fortunately for me, not long afterwards he happened to come across a copy of the latest Austrian Economics Newsletter, which he passed on to me. It was the one with Israel Kirzner's photo on the front page. That was the first I'd heard about a surviving remnant of the Austrian school, run by a student of Mises himself. The knowledge would eventually come in handy, for not long afterwards, after finally quitting the URI program, I found myself working as a "combustion engineer," climbing the insides of power-plant smokestacks when I wasn't sitting on my hands in a laboratory in Stamford, Connecticut. In other words, I was finally at sea, in a manner of speaking, without the foggiest idea of what to do next.
Luckily for me, one of the Austrian works I'd read while at URI was Hayek's Denationalisation of Money. Hazlitt introduced me to the school, and Mises and Böhm-Bawerk showed me the prodigies of scholarship of which its representatives were capable. But it was Hayek who opened my eyes to a vast, unexplored realm for new research. So when, while I was loitering inside that lab, I came across a tiny notice in Reason magazine, offering small grants for summer research, a ready-made proposal was also loitering inside my brain. I duly wrote the thing down and mailed it off to IHS, which was still in good-old Menlo Park back then, receiving from them 1500 smackers in return. Best of all, I got to know Walter Grinder, who was to become a great mentor to me, as he has been to so many others.
That was how I came to write my first paper on free banking. It was called "Free Banking and the Monopoly in Money," and it wasn't all that bad, considering. Still it never saw, and never will see, the light of day. But it did something better than that, by introducing me, with Walter Grinder's help, to Larry White, who was finishing his own dissertation at the time, and was about to enter the job market. After reading a few chapters of his work, I wrote Larry asking him to let me know when he got a job, because I planned to be his first student. For safety's sake, and remembering that copy of the AEN, I also applied to the NYU Austrian program. As luck would have it, Larry got his first job there, and I got a midnight call from Israel Kirzner himself telling me I'd been granted a fellowship. I remember Kirzner saying, "I…h..h…ope I h..h..aven't…w..w…aken you," and replying, "Professor Kirzner, with this news you could call any time!"
So off to NYU I went, and let me tell you, you couldn't have asked for a better education than I got from the Austrian program there. And I don't mean the education I got from the ordinary NYU PhD program, which the Austrian fellows had to endure along with everyone else. The regular NYU program was run-of-the mill, or somewhat worse than run-of-the-mill, thanks to the fact that NYU back then suffered from a severe inferiority complex, which it tried to assuage mainly by making its grad students suffer through more, and tougher, mathematics than the Ivy league rivals of which it was jealous. I know this because I compared notes with students attending those schools. Among other things, none of them ever had to sit through a lecture like the one I and all my classmates got upon first entering the NYU program, in which we were told to have a good look at the students sitting at our sides, because only one of each set of three would be around a year later. "What corny B movies did this jerk get that from?" I asked myself. But a year later it wasn't just two out of three who had dropped out: it was two and counting. I ought to know, because more than once I came within a hair's breadth of becoming dropout number three.
No, sir: what made NYU great back then was the Austrian program. Thanks to it, not only did I get to learn the history of economic thought from Israel Kirzner and economic methodology from Fritz Machlup. I got to attend one of the best economic workshops anywhere: the famous Austrian seminar that's still going strong. I learned more economics by sitting in that seminar than I did from all my required classes combined, which were mostly devoted to applied mathematics and statistics. Better still, I got to spend time with a bunch of grad students who were passionate about economics. Passionate. Just attend a few student sessions–or sessions of any sort for that matter–at the AEA or SEA or Econometric Society meetings, and see how much passion you come across. Then tell me there wasn't anything special about those NYU students.
And they were no less passionate about economics outside of class. All of them read, and some read voraciously, papers and books on economics that weren't on any course syllabus. That was a rare thing among economics grad students even in those days; today econ grad students who make time for extracurricular reading–or who merely believe that such reading might possibly be worthwhile–are rare as hens' teeth. I know that because I served on plenty of faculty recruitment committees while working at UGA, and so got to see the sort of material other schools, including some top ones, churned out. For example, I remember mentioning William Stanley Jevons to a candidate whose dissertation was on monetary search models, and getting a blank stare for an answer. ('Twas Jevons who came up with the phrase, "double coincidence of wants.") That, by the way, was one of the better candidates. On another occasion my fellow recruiters and I thought we might succeed in getting candidates to stop droning on about their boring macro dissertations by asking them to name for us their favorite dead macroeconomists. After half a dozen couldn't think of anyone–not even Keynes, for crying out loud!–and another named Milton Friedman, who was then very-much alive, we gave up.
Nor were my fellow grad students at NYU merely interested in Austrian economics. The whole history of economic thought, and much else besides, interested them. More than a few were hard-core bibliophiles, three of whom lived on different floors of the same rickety lower East Side tenement. Their apartments were furnished with nothing save a mattress and stacks of books, with a narrow chasm, reminiscent of the one at Petra, running through the stacks from the bathroom to the mattress, and another one like it running from the mattress to the kitchen. After seeing them I expected the tenement to come crashing down any day, inspiring a headline in the Daily News, or perhaps the Post, screaming, "Bookworms Buried Alive in Alphabet City Avalanche!" Despite that, I got hooked on books myself, and so ended up standing outside of the Strand first thing every Saturday morning, with several other Austrian nuts, waiting for the opening bell to ring so that we could all pounce on the New Arrivals table that had been freshly stocked the night before. I emerged from those raids with my knuckles bloodied, but also, occasionally, with some damned hard-to-find books. What's more, by gosh, I read them. And I learned a lot of economics that way, and a fair bit about other subjects. Other subjects! In grad school!
But just how valuable, some of you may wonder, could the economics in all those old books have been? I will tell you: far more valuable than the vast majority of things I learned in my regular grad school classes, including what I learned from articles on the reading list. You see, the stuff that was considered leading-edge back then, which is what most of the classes were about, is now for the most part as dead and forgotten as the Kings of Nineveh. And that same fate awaits most of what's being taught in today's econ programs. Yet Smith, Bagehot, and Wicksell, and many others beside, are as alive as ever, if not more alive than ever. That, of course, is what it means for a work to count as a classic. But where I went to school, at least, it seemed that the Austrians were the only ones who appreciated the fact, for never once did any of my non-Austrian professors ever venture to suggest that I might make good use of my time reading something that was as much as a decade old, let alone older than that.***
Worse than that was the obvious disdain shown by many (though by no means all) of NYU's non-Austrian economics faculty toward their Austrian colleagues. I well remember the day when the usually courtly Fritz Machlup came to class visibly upset. He'd just been informed, he told us, that the international finance class he'd taught for decades had been taken from him and assigned to some young Turk. Imagine: Fritz Machlup, himself then already a classic, but not quite tooled-up enough to be worthy of teaching "real" economics (as oppose to soft stuff like methodology) to NYU students! Then there was the time when my first-semester micro teacher asked me to join him after class for a drink. Somehow I'd managed to impress him, and though I was too much of a tyro to realize it at the time, he meant to get me to write under him. Of course he couldn't have succeeded, as I was determined to work on free banking with Larry. But even if I hadn't been it wouldn't have happened, for the first thing he said once we were sitting at the bar was, "You seem pretty smart. So why are you wasting time with those Austrians?", to which I replied, thoughtlessly but without guile, "Because I think they're the best economists here." I suppose that the rest of that drinking session wasn't much fun for either of us. Fortunately I can't remember, and anyway the fellow was a good sport, for I still got an A in his class.
So the truth is that I owe a great deal to Austrian economics, and particularly to the Austrian economists, both actual and in the making, with whom I interacted at NYU. Had it not been for the Austrians, I might still be toying with Lagrangian multipliers, or struggling to figure out why interest rates don't behave as if they served to clear the market for money balances. Worse, I might never have been exposed to the works of so many great economists, the great Austrians among them, from which I continue to draw knowledge to this day. Finally, I would never had learned about free banking, or met Larry White, or gotten to write for Freebanking.org, assuming that it would still have existed. For that and a lot more, I say to my Austrian friends: thanks for everything, and keep on inspiring others.
*Please note that the term refers to a tiny subspecies of the Austrian economics genus. I contemplated having a link to the Wikipedia page of an actual Homo-Austriapatheticus specimen, but decided not to because I might get sued, or stoned.
**Nota Bene: The phrase "Austrian economics" does not occur anywhere in these works, unless in introductions added long after their original appearance.
***Nor did the fact that some of the new stuff we were learning also had lasting value make reading older things any less valuable. For example, although the then counter-revolutionary New Classical economics I was taught was indeed valuable, I found it far easier to grasp than I might have thanks to having read the essays by Albert Hahn gathered together in The Economics of Illusion, which contained the gist of it, though written decades before, and in plain English.