Monday, August 19, 2013

Why Harvard Kids Are Poorly Educated about Business Cycle Theory (And what they can do about it)

Larry Summers is currently the Charles W. Eliot University Professor at Harvard University. He is also rumored to be under consideration by the President to replace Ben Bernanke as Federal Reserve chairman.

Summers has taught a course at Harvard titled, Crisis Economics: History and Evaluation of the Policy Response to the Great Recession. It is instructive to examine the syllabus for this course.

Although a large number of economists are referenced in the syllabus, not one Austrian economist is mentioned.

Not one Austrian is referenced on business cycle theory, despite the fact that the business cycle has been carefully studied by many Austrian economists, including Ludwig von Mises, Friedrich Hayek and Murray Rothbard. Indeed, Hayek was awarded the Nobel Prize in economics specifically for his study of the business cycle.

The Nobel committee wrote that he was awarded the prize for:
pioneering work in the theory of money and economic fluctuations 
Yet, Summers references John Kenneth Galbraith. Here's what Rothbard thought of Galbaraith's work (via Joseph Salerno)
In a review of books on inflation and the business cycle in the late 1970s, one of which included a book by Robert Heilbronner, Rothbard remarked,
Robert Heilbroner, like John Kenneth Galbraith, might be said to fall into the category of "popular economist": that is, someone who knows virtually nothing about economics, yet manages to write a series of best sellers on the subject, read avidly and almost exclusively by noneconomists, who exclaim over the profundities therein.
Rothbard goes on to utilize Galbraith as a standard of economic ignorance, describing Heilbronner as "a lightweight, for he knows even less economics than Galbraith does and lacks the mordant wit (derived, if not cribbed, from Veblen) and the aristocratic life style of the famous opponent of affluence."
No Austrian economist, or student of economics influenced by the Austrians, is referenced in relation to the housing market crisis that is part of the study of Summers' course. Despite the fact that a large number of Austrians warned of the housing bubble (See Walter Block: Who Predicted the Housing Bubble). Indeed, it was my warning about the housing bubble in direct response to a Fed paper arguing there was no housing bubble and my real time warning about the 2008 financial crisis that gained me an invitation to speak at the New York Federal Reserve.

Summers also references Phillip Swagel and his paper, “The Financial Crisis: An Inside View.” I view this as a curious choice in that I confronted Swagel in public in May 2009 about his understanding of the financial crisis. He didn't even know that the money supply was crashing in the summer of 2008. Crashing money supply is a red flag to Austrians that the down phase of the business cycle is about to begin. This is what I reported back then:
Swagel was Assistant Secretary for Economic Policy under Henry Paulson at the Treasury Department from December 2006 to January 2009.

He served as chief of staff at the White House Council of Economic Advisers from July 2002 to February 2005, and was a senior economist at the Council from August 2000 to July 2001.

Swagel was also previously an economist at the Federal Reserve Board and the International Monetary Fund.

Swagel spoke at a luncheon today before the Washington D.C. based National Economists Club. I was there and had the opportunity to ask Swagel a couple of questions[...]

"[...] let me ask you an economics question. Was there any concern at the Treasury about the slowdown in Fed money growth during the summer of 2008?"

He tried to answer with, "Well the Treasury is always in touch with the Fed and we are always monitoring every aspect of the economy."

I wouldn't let him get away with it. I pushed, "Do you know what money growth was in the summer of 2008?" His answer. "No." I pushed, again, "Do you know what money growth was in the first half of 2008?" His answer. "No."

I remind you this was the Assistant Secretary for Economic Policy at the Treasury Department during this period. Money growth dropped from a 12% annualized rate early in the year to 1.4% during the summer, in the midst of a housing crisis. 
Clearly, Swagel was not at the Treasury to monitor the economy. He was a tool used to come up with the justifications for the machinations of the real insiders, e.g., Paulson.
Paulson didn't care what caused the downturn. He cared about how to shovel money to Goldman and JPMorgan. And when it comes to justifications for why all that occurred, Swagel has microscopic details (pdf).

After the formal luncheon broke, I pushed a little more, privately. I asked him if there were any memos at all in the Treasury by anyone raising the question of why Bernanke had slowed money growth to 1.4% during the summer of 2008. He said, he hadn't seen any.

Time after time, I am shocked at how often mainstream professional economists, including top level Treasury and Federal Reserve economists, display a complete lack of understanding about Austrian school economics in general and business cycle theory in particular. The same can't be said about Austrian school economists understanding of Keynesianism, they know Keynesian economics cold and where Keynesian analysis fails.

Summers' syllabus provides one clue as to why Harvard students are so ill informed about business cycle theory. Although he is hailed as "brilliant," Summers has managed to miss an entire school of thought that has a particular focus on business cycle theory. Either that, or he has chosen to ignore the school and not attempt rebut Austrian theory, despite Austrians being correct about the 2008 crisis and earlier crises.

Most Austrian economists, first started learning about Austrian economics on their own. It appears the same thing needs to be done by Harvard students. Here's a good start for them : Economic Depressions: Their Cause and Cure

No comments:

Post a Comment