Austrian School: Crap/Not Crap?

[camouflage]

I've been wondering whether I've been fair on the Austrian School of economic thought, Mises an all that, so I thought I'd ask here.

 

[articul8]

This is where neo-liberalism really begins - with the fall of Austrian social democracy and the proto-fascist [though not Nazi] arguments of Mises (who worked for Dollfus)

 

[camouflage]

Dollfus aye? I wonder who that is then, will have to wikyit, but alas, tis past my bed-time.

 

[ViolentPanda]

Dollfus aye? I wonder who that is then, will have to wikyit, but alas, tis past my bed-time.

Englebert Dollfuss, the between-the-wars Austrian conservative pol who became chancellor a couple of years before eating Nazi bullet. The sort of economics von Mises proposed would have appealed to Dollfuss because they were, well, Austrian and conservative.

As for whether posterity has leant weight to the theorising of the Austrian School, that depends which side of the economic line you're on. Laissez faire does generally, after all, give more to he that already has, but as far as how the working classes have benefitted from the work of the Austrian School, we haven't. In fact one could place part of the blame for the current clusterfuck on the witterings of von Mises and his vomitous ilk.

 

[JimW]

Impression I got from somewhere I can't recall is that the Austrians lost the intellectual argument in Europe way back, slipped to the margins then resurfaced years later in the States but by that time no-one elsewhere took them seriously enough any more to bother with a thorough refutation again (target had moved on to the Chicago School proper) , hence they thrived in the peculiar space of libertarian politics in America, were Mr Logic high school debating and unquestioned capitalist assumptions rule.
Does that sound familiar to anyone else? Might have it all round my neck.

 

[ItWillNeverWork]

There are a few problems I have with the Austrian school. For example their theory of the business cycle.

The Austrians believe that long term investments by firms in new projects, and the ability of households to consume the goods produced by these projects, are coordinated over time via the interest rate. So for example, if lots of households decide to start saving there will more money for the banks to lend out; in order to lend out this newly increased amount of money, the banks will compete with each other for borrowers by lowering the interest they charge.

Firms see that the interest rate on borrowing is lower, and so will think that longer term investments are now affordable when they were not previously. Because investments in new projects (building a new factory, or block of apartments, or whatever) take time to come to fruition, it is not until further on down the line that firms will know that their investments are actually profitable. Fortunately for the firms, in a free market the new projects will find sufficient demand for their goods because households have been saving their money.

The Austrians claim that when a central bank lowers interest rates, firms are encouraged to borrow money for investment when no prior saving has taken place by households. This means that firms will engage in instigating new projects (a boom is set underway). Once these projects are completed, and the firms try to sell their newly increased output, they will find that aggregate demand is just not high enough to absorb that output; the reason being that noone has been saving their money. The inevitable bust arrives. Austrians suggest that central banks should be abolished and that the free market should be allowed to equilibrate saving with investment (and hence aggregate demand with aggregate supply).

The main problem I have with this is that it misunderstands (just like the neoclassicals) the way in which credit is created. They assume that saving is required before the banks are able to lend, but in reality a bank can simply type a few numbers into a computer and credit a borrowers account with however much they want. So the link between saving and lending does not exist and there is nothing to stop the banks creating a boom in investment all on their own. Even without a central bank a boom-bust cycle, such as the Austrians describe, could occur. This does not preclude the possibility of a government induced recession of course, but neither does it preclude the possibility of an endogeonously created one.

There are other issues I have with the Austrians but this is good enough for a start.

BTW I didn't vote in the poll as I think that they are part crap part non-crap. Even turds contain a speck of gold now and again.

 

[purves grundy]

Did they have owt to do with the Vienna circle? Seems a number of points at which their positivism would overlap, but iirc a fair few of the Vienna circle were Marxists so maybe that's not the case...

 

[love detective]

but in reality a bank can simply type a few numbers into a computer and credit a borrowers account with however much they want.

This is a common misconception that seems to be rife within the left and particularly the occupy movement at the moment

It's absolute rubbish however and stymies any kind of proper understanding, and therefore also any grounded critical analysis, of the banking & credit systems

At both the systemic and individual level the credit system and lending is dependent upon money (and by extension other forms of value) circulating. If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on

 

[revol68]

I assumed ItWillNeverWork was referring to how loose the banks were with their lending, y'know sub prime mortgages, as well as their novel accounting techniques that allowed them to present future projections as actual assets and how that invalidates the Austrian schools neat little notion of the market regulating credit.

 

[love detective]

Nah, the point was a reference to how credit/money is created, not what is subsequently done with it

As to novel accounting techniques - all financial assets are is a reflection of projected future income streams, so in principle there's nothing outlandish about recognising an asset in the here and now based on cashflows in the future

The problem is that the market is never able to see the absurdity behind a lot of these projections/estimates and instead of moderating them in the way that market champions suggest it does, it ends up facilitating the compounding of the situation and instead of regulating this nonsense it lends it legitimacy and makes bubbles out of it.

But it can never do anything other than that, when capital roams around and looks for more and more autonomous ways of capturing a share of value created elsewhere, the sheer momentum of it means there's no room for the kind of timely 'market logic' and correctional regulating ability that the theorists, in the face of increasingly regular crisis, continue to imbibe it with

obligatory marx quote:-

In the crises of the world market, the contradictions and antagonisms of bourgeois production are strikingly revealed. Instead of investigating the nature of the conflicting elements which errupt in the catastrophe, the apologists content themselves with denying the catastrophe itself and insisting, in the face of their regular and periodic recurrence, that if production were carried on according to the textbooks, crises would never occur. Thus the apologetics consist in the falsification of the simplest economic relations, and particularly in clinging to the concept of unity in the face of contradiction

 

[ItWillNeverWork]

This is a common misconception that seems to be rife within the left and particularly the occupy movement at the moment

It's absolute rubbish however and stymies any kind of proper understanding, and therefore also any grounded critical analysis, of the banking & credit systems

At both the systemic and individual level the credit system and lending is dependent upon money (and by extension other forms of value) circulating. If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on

I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?

 

[ViolentPanda]

I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?

No, because what they're doing is crediting you is "already-existing money". Your bank can't create money, only the central bank can do that.

 

[ItWillNeverWork]

No, because what they're doing is crediting you is "already-existing money". Your bank can't create money, only the central bank can do that.

This is what I disagree with - the multiplier model. I go along with the theory of endogenous money that Steve Keen writes about. I'll try and fish out the study, but in one of Keen's lectures on his website, he mentions some empirical research that was done showing how base money expands after the expansion of other measures of money; implying that central banks do not have as much control over the money supply as they think.

 

[ItWillNeverWork]

From Keen's "The Roving Cavaliers of Credit":

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Two hypotheses about the nature of money can be derived from the money multiplier model:

1. The creation of credit money should happen after the creation of government money. In the model, the banking system can’t create credit until it receives new deposits from the public (that in turn originate from the government) and therefore finds itself with excess reserves that it can lend out. Since the lending, depositing and relending process takes time, there should be a substantial time lag between an injection of new government-created money and the growth of credit money.

2. The amount of money in the economy should exceed the amount of debt, with the difference representing the government’s initial creation of money. In the example above, the total of all bank deposits tapers towards $10,000, the total of loans converges to $9,000, and the difference is $1,000, which is the amount of initial government money injected into the system. Therefore the ratio of Debt to Money should be less than one, and close to (1-Reserve Ratio): in the example above, D/M=0.9, which is 1 minus the reserve ratio of 10% or 0.1.

Both these hypotheses are strongly contradicted by the data.

Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990.[3] If the hypothesis were true, changes in M0 should precede changes in M2. ... Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

[...]

Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

It doesn’t take sophisticated statistics to show that the second prediction is wrong—all you have to do is look at the ratio of private debt to money. The theoretical prediction has never been right—rather than the money stock exceeding debt, debt has always exceeded the money supply—and the degree of divergence has grown over time.

 

[sleaterkinney]

Impression I got from somewhere I can't recall is that the Austrians lost the intellectual argument in Europe way back, slipped to the margins then resurfaced years later in the States but by that time no-one elsewhere took them seriously enough any more to bother with a thorough refutation again (target had moved on to the Chicago School proper) , hence they thrived in the peculiar space of libertarian politics in America, were Mr Logic high school debating and unquestioned capitalist assumptions rule.
Does that sound familiar to anyone else? Might have it all round my neck.

Now over here too via the Lib-dems and the Tories. They might not say it out loud but their policies stem from the same thinking. The argument doesn't stand up which is why they are using the debt crisis as an excuse instead.

 

[love detective]

I don't see how this invalidates my point. If my bank increases my overdraft then they can do so with a few taps on the keyboard. The money supply has been increased has it not?

Your conflating the final stage of the transmission mechanism of extending credit with the material conditions that need to be in place to allow that extension to happen in the first place

Tapping a few numbers into a computer is clearly one thing that is required in the overall process of lending from a bank to another party - but mistaking this for the only thing that's required, and positing this tapping on the keyboard as both necessary and sufficient stands in the way of a proper understanding of what actually happens, and therefore any chances of a proper critique of it

This is not an exact analogy, but what you're saying is similar to saying that pressing the lever on a petrol pump at a petrol station creates petrol

Also re your point about endogenous and the money multiplier - this is pretty much irrelevant, and a separate thing, to your initial point about how banks create credit money. Whether one argues that central bank money exists first which then seeds credit money or whether credit money is created first and then ultimately backed by central bank money creation - the simple fact remains that tapping a few numbers on a keyboard is not all that is required for a commercial bank to extend credit to another party - and this point holds whether you hold an endogenous, exogenous or erogenous theory of money/credit creation

If a bank wants to lend to someone it must be able to fund that lending, and whether this funding is sourced through customer retail deposits, commercial bank borrowing in the money markets, asset sales, central bank financing or any other method, it doesn't change the simple fact that you can't lend what you haven't funded

 

[ItWillNeverWork]

Your conflating the final stage of the transmission mechanism of extending credit with the material conditions that need to be in place to allow that extension to happen in the first place

If a bank wants to lend to someone it must be able to fund that lending, and whether this funding is sourced through customer retail deposits, commercial bank borrowing in the money markets, asset sales, central bank financing or any other method, it doesn't change the simple fact that you can't lend what you haven't funded

Why can't you? Isn't this what fractional reserve banking is by definition?

Also re your point about endogenous and the money multiplier - this is pretty much irrelevant, and a separate thing, to your initial point about how banks create credit money.

Actually, I thought that it was the point I made initially. I assumed that you were making the argument that only central banks could create new money.

If it doesn't circulate in the 'right' quantities to the 'right' places at the 'right' times, the conditions for lending do not exist and no amount of typing numbers into a computer can create, replicate or magic into existence this material base that lending is dependent on

Could you go into this a little more? Specifically what you mean by circulating to the 'right' places/times. Cheers.

...erogenous theory of money

 

[Captain Hurrah]

 

[love detective]

Why can't you? Isn't this what fractional reserve banking is by definition?

Nope, it's nothing of the sort - it's the complete opposite in fact. Fractional reserve banking can only happen if money circulates - it's not about just creating loans out of thin air through the tapping on a keyboard within a commercial bank. If you are a bank and want to take part in the circulation of money/credit, you can't do it unless you either already hold money or someone deposits it with you (through any of the forms I mentioned in the last post) - then you can lend it on and it turn through circulation it may end up back with you (through further deposits) which you can lend on again. There's nothing magical or conspiratorial about fractional reserve lending, it's just money circulating, and for you as bank to take part in that onward circulation of money/loans/deposits it has to first circulate to you before any of that can happen.

If you look at a balance sheet of any bank in it's financial accounts, unsurprisingly the balance sheet adds up to zero - i.e. total assets equals total liabilities - this shows that every asset a bank has is funded by an equivalent liability - i.e. you can't create an asset out of thin air, it has to be funded by something, if you don't have the funding/liability you can't extend the loan/asset

So just like if someone has a tenner and uses that tenner to buy something from someone else and the person they bought that thing from buys something from someone else and so on, which means a single bit of money can effect the purchase and sale of a much higher amount than it represents off and in itself. Likewise if instead of purchases & sales, that tenner is lent and borrowed lots of times (i.e. effectively fractional reserve lending with zero reserve requirements), all that happens is that same bit of money leaves in its trace a string of deposits and loans within the system. All of these in the widest sense/definition represents the money supply.

However for that string of circulation to happen (and to be mediated by the banks) a whole load of things have to happen external to the banks doing the mediating (i.e. money & value has to be successfully completing the circuit of capital). Banks are not the independent actor in all of this, they are the dependent one (obviously they can also put a hold on circulation, so they are not wholly dependent, but they are not wholly independent either)

You just need to look at what's going on around us at the moment to see this demonstrated - the circulation process is seizing up meaning banks can't fund themselves (and therefore extend loans) through the normal processes and instead have to rely on copious amounts of central bank funding to keep going. If banks were the independent actor in all this as is commonly suggested they wouldn't need any of this support, they would just magic the money into existence through copious amounts of keyboard tapping, but they can't, so they don't.

Actually, I thought that it was the point I made initially. I assumed that you were making the argument that only central banks could create new money.

Base money can only be created by the central banks, and only commercial banks can circulate this - the total of these two things represents the total money supply. So money supply (in it's widest sense/definition) can be increased by either central banks doing something (creating new base money) or commercial banks doing something (facilitating the circulation of that money). However commercial banks can't magic into existence the situation where they can take part in that circulation process purely through tapping on their keyboards - which was the point you made initially i.e. you said:-

in reality a bank can simply type a few numbers into a computer and credit a borrowers account with however much they want

Could you go into this a little more? Specifically what you mean by circulating to the 'right' places/times. Cheers.

Hopefully some of what I wrote above makes more sense of what I meant above, but if not can go into more detail (away from computer all day though today)

It is the humour!

 

[ViolentPanda]

From Keen's "The Roving Cavaliers of Credit":

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

All of which fractional reserve banking sets on its' arse. The model needs to take that (government-sanctioned credit creation - in effect "government money) into account, I'd have thought.

 

[ViolentPanda]

Why can't you? Isn't this what fractional reserve banking is by definition?

Not really. FRB isn't a bank creating money, it's a bank exercising the ability to extend government-sanctioned credit that's already been accounted for in the "money supply".

 

[JimW]

It is the humour!

I thought it was an oblique reference to Marx's regular touching of Engels for a fiver.

 

[littlebabyjesus]

One can 'create' money by revaluing one's assets upwards, can one not? Isn't that Keen's point about the ponzi scheme that was the exploding property market?

 

[nino_savatte]

This is where neo-liberalism really begins - with the fall of Austrian social democracy and the proto-fascist [though not Nazi] arguments of Mises (who worked for Dollfus)

Not only Mises but Hayek too iirc.

Both of them, along with Friedman, were members of the Mont Pelerin Society.

 

[Blagsta]

One can 'create' money by revaluing one's assets upwards, can one not? Isn't that Keen's point about the ponzi scheme that was the exploding property market?

fictitious capital, not backed by commodity production, presumably

 

[revol68]

fictitious capital, not backed by commodity production, presumably

yeah, that's what I assumed ItWillNeverWork was talking about.

I mean the banks did lend way beyond their funds and instead of this being solved by them crashing and burning, instead they got bailed out by public money, as well as central banks actually having to print more money.

In that sense the commercial banks essentially increased the money supply by presenting states and central banks with a fait acompli? no?

 

[love detective]

One can 'create' money by revaluing one's assets upwards, can one not?

No - and again this is making a similar mistake to IWNW

You can revalue your assets upwards to your hearts desire but in and off itself (just like IWNW's banks hammering away on their keyboards) it won't create a bean of money (try it now and see what happens)

If however you have an asset, and then for whatever reason (and due to circumstances, at least in part, external to you) the future income stream from that asset is expected to be more than previously expected, then you may be able to use the increased value of the asset as collateral to obtain credit. But only at that stage is credit money 'created' - and in turn whoever extends that credit to you has to do more than just tap away on their keyboard, they have to first agree with your valuation of the asset pledged as collateral and secondly be able to fund the extension of credit to you (alternatively, instead of borrowing against the value of the asset, you could just sell the asset outright to someone but the same conditions still apply - the other party has to source the funds from somewhere and need to agree with your valuation).

But for any of this to happen, the trigger is not one just revaluing one's assets upwards. Revaluing your assets upwards (just like the tapping away on the keyboard at the bank to transmit credit to a customer) is an activity which requires a 'material' basis for it to happen - it's a reflection of something that has happened elsewhere, it's the dependent not independent variable in the process, it's the consequence of an event not its cause.

So you can't just arbitrarily revalue an asset upwards and this in and off itself 'creates money'. Even if the revaluation of the asset is an accurate reflection of an actual increase in its worth (i.e. an increase in the future discounted cash flows expected from it) - this still doesn't lead to the 'creation of money' - only if that increased asset value can be used to effect a credit transaction with another party who can fund the lending, is credit money then actually 'created'

Also revaluing an asset upwards in and off itself doesn't create ficticious capital in the marxist sense - only when the process described above starts to happen, when the titles to, or claims on, those assets (whether revalued upwards or not) start circulating independently of the asset they relate to, does fictitious capital come into being

 

[love detective]

In that sense the commercial banks essentially increased the money supply by presenting states and central banks with a fait acompli? no?

In the build up of and prior to the crash, the credit fuelled property bubble could be seen as a movement by capital to take on an autonomous form and break free from the grounded restrictions of the thing that gives life to it in the first place - i.e. value production & appropriation through the exploitiation of labour.

However this attempt to move away from its material base, can only ever be temporary, crisis intervenes as it always will to irrationally rationalise the irrational system. This involves the destruction of value of all types, physical, real and fictitious - and therefore whole swathes of loans, assets and liabilities that were based on this bubble gets destroyed.

And if your talking about money in its widest sense then crisis has substantially reduced the money supply as a result. So there's no fait acompli in terms of commercial banks (and interdependent activity elsewhere in the real world) bringing the money supply up to a certain high level and forcing states & bank to support it at that level. The crisis destroyed a large part of the 'money supply' that had built up through these activities (remember one bit of 'money', through circulation can leave in its trace huge multiples of loans & deposits, likewise the reverse is true, they can all be unwound and destroyed in a similar manner). The banks needed bailing out because large elements of that increased money supply they had attempted to build (i.e. property backed credit loans) had to be written off. The bailouts weren't to support the artificially increased leveraged/multiplied money supply that the bubble built up, but to enable the banks to survive once it had all been written off

 

[revol68]

In the build up of and prior to the crash, the credit fuelled property bubble could be seen as a movement by capital to take on an autonomous form and break free from the grounded restrictions of the thing that gives life to it in the first place - i.e. value production & appropriation through the exploitiation of labour.

However this attempt to move away from its material base, can only ever be temporary, crisis intervenes as it always will to irrationally rationalise the irrational system. This involves the destruction of value of all types, physical, real and fictitious - and therefore whole swathes of loans, assets and liabilities that were based on this bubble gets destroyed.

And if your talking about money in its widest sense then crisis has substantially reduced the money supply as a result. So there's no fait acompli in terms of commercial banks (and interdependent activity elsewhere in the real world) bringing the money supply up to a certain high level and forcing states & bank to support it at that level. The crisis destroyed a large part of the 'money supply' that had built up through these activities - the banks needed bailing out because large elements of that increased money supply they had attempted to build (i.e. property backed credit loans) had to be written off. The bailouts weren't to support the artificially increased money supply that the bubble built up, but to enable the banks to survive once it had all been written off

Yeah, the whole thing of finance losing itself in a mastubatory frenzy, imaginging itself as autonomist and self sustaining. I get that, the crisis is the bit where it looked down and realised there was nothing below it, like the coyote in the road runner cartoon.

I thought ItWillNeverWork's point was that the austrian schools notion of the free market self regulating was the fact that they don't and didn't, as shown by the fact they created massive bubbles of fictious capital, of money that had no backing.
I don't think anyone was arguing that this was a process that could go on indefinitely, rather that it can go on for a period before eventually crashing back to reality and that deregulated finance is a dead cert to produce these bubbles.

Also I take your point about the bailouts being used to cover loans being written off and the like, but has it not still led to central banks being pushed into printing money that actually isn't backed up by anything, that is they intervened to stop it contracting all the way back to what it should be? Am actually stabbing in the dark in that one btw.

 

[love detective]

i'm off out to the IWCA xmas social in a minute so will need to return to this tomorrow

briefly though IWNW made a number of points in his initial post - i agreed with most of them (i.e. the ones you repeated above about the fallacy of the market self regulating and I made agreeing comments on that in the last couple of paragraphs of this post above) but not with all of them (i.e. about money creation), so I think some of these points are being conflated and talked about as one thing when they are not

and yeah central banks have printed money, but if that doesn't circulate with appropriate vigour (which at present it's not really) it doesn't do much in terms of the overall money supply. As the key measures of money supply reflect not only how much 'base money' is in the system but how fast it circulates - and the base money part is usually only a small fraction of the total wider money supply, with the rest made up of it moving around everywhere, circulating, velocity and all that stuff. So the central bank creation of money through QE and the like is an attempt to boost up the overall money supply through injecting more base, to compensate for the fact that the crisis has resulted in a massive contraction in the velocity of circulation compared to previously