Friday, September 24, 2010

Bernanke Throws the Austrian School of Economics Down the Memory Hole

Federal Reserve chairman Bernake visited his old stomping ground, Princeton University, where he was supposedly an expert on the Great Depression, but completely missed the current crisis, and said:
Almost universally, economists failed to predict the nature, timing, or severity of the crisis; and those few who issued early warnings generally identified only isolated weaknesses in the system, not anything approaching the full set of complex linkages and mechanisms that amplified the initial shocks and ultimately resulted in a devastating global crisis and recession.
Bernanke said this despite consistent warnings across the board from Austrian economists about the nature and structure of the financial and economic crisis that was to come, see herehere and here.

When Noble Prize winning Austrian economist, Friedrich Hayek, wrote that many economists by mimicking the methodology of the physical sciences had an inferiority complex because the social sciences required a different methodology than the physical sciences, he must have had an economist such as Bernanke in mind. Bernanke continued in his embarrassing speech:
As you may have already guessed, my terminology is intended to invoke a loose analogy with science and engineering. Underpinning any practical scientific or engineering endeavor, such as a moon shot, a heart transplant, or the construction of a skyscraper are: first, fundamental scientific knowledge; second, principles of design and engineering, derived from experience and the application of fundamental knowledge; and third, the management of the particular endeavor, often including the coordination of the efforts of many people in a complex enterprise while dealing with myriad uncertainties. Success in any practical undertaking requires all three components. For example, the fight to control AIDS requires scientific knowledge about the causes and mechanisms of the disease (the scientific component), the development of medical technologies and public health strategies (the engineering applications), and the implementation of those technologies and strategies in specific communities and for individual patients (the management aspect). Twenty years ago, AIDS mortality rates mostly reflected gaps in scientific understanding and in the design of drugs and treatment technologies; today, the problem is more likely to be a lack of funding or trained personnel to carry out programs or to apply treatments.
Then knowing he is completely wrong about his methodology, he actually turns 180 degrees and curtsey's in front of Hayek:
I don't want to push this analogy too far. Economics as a discipline differs in important ways from science and engineering; the latter, dealing as they do with inanimate objects rather than willful human beings, can often be far more precise in their predictions.
In this speech, Bernanke ignores the economists that warned about the crisis, ignores their methodology, spins 180 degrees to acknowledge the problems with his methodology and then makes bizarre suggestions to fix economics, when the economists who have explained and understood the business cycle have done so for centuries, see for example the writings of Richard Cantillon, circa 1755.

1 comment:

  1. A central banker ignoring the theories that explain how central banking is wrong. Surprise, surprise!