The Tea Party and “Austrian” Economics
By Nick Gier, Unfiltered 6-17-10
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The economy is having an excellent run and business is booming.
--The Economist’s Special Report on Social Democratic Austria
At the Maine GOP convention in May the delegates scrapped the previous platform and instead supported Tea Party policies, which one observer described as a “mix of right-wing fringe policies, libertarian buzzwords, and outright conspiracy theories.”
The call for “Austrian” economics was probably the most confusing reference, and many people might be wondering why these conservatives are including something positive from Europe, the home of those Godless socialists.
Let me begin with the economics of post-war Austria as way to argue against what the Tea Party means by “Austrian” economics. The Social Democratic Party and the conservative People’s Party have ruled Austria in a “grand coalition” for 45 out of the last 61 years.
The two parties developed a welfare state with taxes taking 43 percent of GDP compared to 40 percent in other European Union countries. (The U.S. share is 28 percent.) At purchasing-power-parity Austria is the fourth richest country in the European Union and has, thanks to strong tax revenues, a budget deficit of 5 percent. Economic growth over 10 years and through the Great Recession has been a respectable 2.3 percent and unemployment is steady at 4.9 percent.
More than half the Austrian workforce is unionized, and workers and management follow the German model of “consensus” labor relations. Completely contrary to the Tea Party’s “Austrian” economics, unit labor costs, according to The Economist, “fell by an astonishing 38 percent” from 1995-2005. Just like its huge neighbor Germany, Austria has maintained a strong manufacturing base with 19 percent of “value added to the economy” compared to the US and the UK at 13 percent.
The Tea Party means something very different by “Austrian” economics. They are referring to the Austrian economist Ludwig von Mises, who influenced free marketeers Milton Friedman, Ayn Rand, Ron and Rand Paul, and Alan Greenspan, long-time chairman of the Federal Reserve. Although Ayn Rand angrily rejected the term, this movement has been called “libertarianism.”
Von Mises was one of the first to predict the collapse of Communism and he was right about the abysmal failures of the “command” economy. He stubbornly believed, however, that any government intervention in the economy would be disastrous. The world-wide success of the social democratic “Third Way” between Communism and unfettered capitalism stands as strong empirical disconfirmation of his theories.
Libertarians believe that businesses are the best judge of their own interests and that, as rational actors, they will not do anything that will jeopardize their investments. This principle stood behind the Bush Administration’s policy of voluntary self-regulation in industry.
The oil and gas industry has exemptions from the Clean Water Act and other environmental laws, and its leaders have promised that they would stop using benzene as part of its fluid mixtures for fracturing gas-bearing rock. But in July, 2008, cancer causing benzene at 1,500 times safe levels was found in a Wyoming fresh water well in an area where Halliburton was drilling.
In testimony before a Congressional committee in 2008 Greenspan confessed that he was in a state of “shocked disbelief” that the unregulated markets that he had championed for years had failed. He admitted that he made "a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."
Ideologues of all strips are a stubborn lot so we have to admire Greenspan’s honesty. Today there are die-hard Communists who insist that the failure of Marxist-Leninist economics was due to a lack of theoretical purity and application.
Libertarians also declare the failures of countries that applied libertarian solutions, such as the U.S., Iceland, Ireland, and the Baltic States, did not go far enough in tax reduction, spending cuts, and deregulation. Both camps are living under grand delusions.
It is almost a cliché to say that the truth always lies in the middle, but Confucius, the Buddha, and Aristotle were right about the Golden Mean between extremes, and Social Democrats have proved that the Middle Way between economic extremes is the best one to follow.
Nick Gier taught philosophy at the University of Idaho for 31 years. Read all of his columns about “The Third Way” at www.home.roadrunner.com/~nickgier/ThirdWay.htm
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Comments
His first error is listing Ayn Rand, Alan Greenspan, and Milton Friedman as adherents of the Austrian school. Rand and Friedman are understandable mistakes, but including Greenspan, the former head of the most powerful socialist institution in the United States, is simply laughable. Grier then goes on to claim that the prosperity of "third way" economies "stands as strong empirical disconfirmation of his [Mises'] theories". The point is not that these countries should be poor, but that they are poorer than the would have been had their governments refrained from intervening in the economy.
Prof. Grier follows up by claiming that libertarian principles "stood behind the Bush Administration’s policy of voluntary self-regulation in industry." However, economic regulations actually increases under the Bush administration. The example he provides, a result of the absence of property rights in water, actually supports the free market position.
He then goes on to quote from Greenspan's well-publicized remarks about the failure of the free market. Even though Greenspan incessantly intervened in the economy during his tenure as Fed chairman (has Prof. Grier even heard of the "Greenspan put"?), we're expected to now believe Greenspan was really a champion of laissez-faire based on his self-serving testimony before congress. One of von Mises' major contributions to economics is explaining how a central bank's expansion of the money supply leads to an unsustainable boom and subsequent bust, which is exactly what happened over the last several years.
Fascism is a political system in which the government coopts corporations to work for its political ends, while Communism wants to eliminate private business altogether. Obama's and Europe's attempt to preserve private business but reign in its excesses is exactly the Golden Mean of which I speak and support.
I knew that "libertarians" of all sorts would come out of their hiding places and declare that I don't know what I'm talking about, and especially don't know anything about libertarianism. I've studied it and taught for nearly 40 years, so I think I can give an informed judgment.
Libertarians are right to encourage governments to privatize nationalized industries, but 60 years of economic facts prove that they are wrong in saying that the economy would perform even better with no intervention at all.
There is absolutely no evidence that European countries have been pauperized by Social Democracy, just the opposite is true. On either social and health indicator these countries (even Greece) give their people better lives.
But Iceland, Ireland, the Baltic States, and the U.S. are definitely poorer because they failed to regulate their banks. Our neighbor to the north is very smug after being criticized for its well-regulated but "boring" banks. They are enjoying that last Social Democratic laugh on the supercilious libertarians. And Canadian liberals and conservatives did this, not the Social Democrats.
Hard economic facts (I read them about them every week in the free market Economist) show that the one extreme Communism was a horrible failure and at the other extreme unfettered markets have proved to be disastrous.
So the Fed causes booms and busts? What caused even worse earlier booms and busts? The answer is clear: Cowboy Capitalism.
We must be prudent and not ideological. I'll take the Golden Mean, fined tuned every day.
"Obama's and Europe's attempt to preserve private business but reign in its excesses is exactly the Golden Mean of which I speak and support."
In other words, you support large and powerful business interests colluding with the government in order to enrich themselves and protect their market position through regulation. I'm glad you cleared that up.
"There is absolutely no evidence that European countries have been pauperized (nice of you to put words in my mouth) by Social Democracy, just the opposite is true. On either social and health indicator these countries (even Greece) give their people better lives."
And the people of those countries would have been better off under laissez faire. Also, I need to point out, that even if your contention is true that social democracy is what lead to higher "social and health indicators" in these countries, it would only prove that these gains came at the expense of things that their inhabitants valued more. That's basic economic logic.
"But Iceland, Ireland, the Baltic States, and the U.S. are definitely poorer because they failed to regulate their banks. Our neighbor to the north is very smug after being criticized for its well-regulated but "boring" banks. They are enjoying that last Social Democratic laugh on the supercilious libertarians. And Canadian liberals and conservatives did this, not the Social Democrats."
This is all well and good, but it's entirely fallacious. I'm sure most libertarians would agree that government regulation to correct the problems caused by the government (in this case through the central bank) isn't necessarily a bad thing. Ron Paul made this exact point when he voted against the Gramm–Leach–Bliley Act. Of course, we'd also argue that the better course would be to eliminate the root of the problem.
"So the Fed causes booms and busts? What caused even worse earlier booms and busts? The answer is clear: Cowboy Capitalism."
Are you familiar at all with Austrian business cycle theory? According to that theory the driving force behind economic booms and busts is an expansion in the supply of money. While a central bank isn't always necessary for this process to occur, it is an "economic fact" that in the modern world it is central banks that are behind this process. If you actually knew anything about the topic at hand, you'd already know this. Amazing that in your 40 years of studying libertarianism you've never heard of any of this before.
"We must be prudent and not ideological."
And who decides what is "prudent" and what is "ideological"? This sounds like an excuse for intellectual laziness to me. What you're doing is just declaring your position correct ("prudent", "pragmatic", etc...) and labeling anyone who disagrees with you an ideologue.