Monday, October 26, 2009

Economics and Moral Courage

A great and important speech, sponsored by the Future of Freedom Foundation and the George Mason University Economics Club, was delivered at GMU on September 9, 2009 by Lew Rockwell.

It must be really painful to be an economist of the mainstream today, or, at least, it should smart to some extent. In a financial and economic calamity of the current scale, people naturally want to know who issued the warnings about the real estate bubble and its likely aftermath.

When private sector jobs have grown none at all in ten years, and when ten years of domestic investment is systematically undone in the course of 18 months, when housing prices in some sections of the country collapse 80%, and when formerly prestigious banks go belly-up or receive many billions in rescue aid, people want to know which economists saw this coming.
Perhaps it is these economists, the ones who had long issued the warnings, and not the ones relentlessly consulted by the media, who should be giving the guidance about going forward. Maybe it is they who ought to be weighing in on whether the new stock-market boom is a reflection of reality, or another bubble developing within a bust that could lead to a secondary depression.

Among the mainstream, however, no one saw it coming. That is because they have never learned the lesson that Bastiat sought to teach, namely that we need to look beneath the surface, to the unseen dimensions of human action, in order to see the full economic reality. It is not enough just to stand back and look at points at a chart going up and down, smiling when things go up and frowning when things go down. That is the nihilism of an economic statistician who employs no theory, no notion of cause and effect, no understanding of the dynamics of human history.

So long as things were going up, everyone thought the economic system was healthy. It was the same in the late twenties. In fact, it has been the same throughout human history. It is no different today. The stock market is going up, so surely that is a sign of economic health. But people ought to reflect on the fact that the highest-performing stock market in the world in 2007 belonged to Zimbabwe, which is home to a spectacular economic collapse.

It is because of the tendency to look at the surface rather than the underlying reality, that business cycle theory has been a source of such confusion throughout economic history. To understand the theory requires looking beyond the data and into the core of the structure of production and its overall health. It requires abstract thinking about the relationship between capital and interest rates, money and investment, real and fake saving, and the economic impact of the central bank and the illusions it weaves. You can't get that information by watching numbers blow by at the bottom of your tv screen.

Then when the crisis hits, it comes as a complete surprise, and economists find themselves in the role of forging a plan to do something about the problem. This is when a crude form of Keynesianism comes into play. The government spends what money it has and prints what it doesn't have. Unemployed people are paid. Tricks to prop up failing industries abound. Generally, the approach is to gin up the public to engage in some form of exchange to keep reality at bay.

Austrians counsel a different approach, one that takes account of underlying reality during the boom phase. They draw attention to the existence of the bubble before it pops, and once it goes away, the Austrians suggest that it does no good to blow another bubble or otherwise keep uneconomic production and plans going.

The Austrians in the late 1920s and early 1930s found themselves having to explain this again and again, but it was the onset of the age of positivism – the method that posits that only what you see on the surface really matters. So they had a very difficult time making points that were more sophisticated. They were like scientists trying to address a convention of witch doctors.
The same is true today. The Austrian account of the depression requires thinking on more than one level to arrive at the truth, whereas economists these days are more likely to be looking for obvious explanations and even more obvious solutions, even when these neither explain nor solve anything.

This puts the Austrians in an interesting position within the intellectual culture of any time and any place. They must go against the grain. They must say the things that others do not want to hear. They must be willing to be unpopular, socially and politically. I'm thinking here of people like Benjamin Anderson, Garet Garrett, Henry Hazlitt, and, on the Continent, L. Albert Hahn, F.A. Hayek, and, above all, Ludwig von Mises. They gave up career and fame to stick with the truth and say what had to be said.

Later in life, Hayek was speaking before a group of economics students. He bared his soul about this problem of the moral choices economists must make. He said that it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in his experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.

Read the full speech here.

1 comment:

  1. Glad to see interaction between the Mises Institute and GMU.