The “Austrian” Delusion

I’ve nearly finished Richard Dawkins’ The God Delusion. Very interesting, although I did find his discussion on the evolutionary roots of religion somewhat unconvincing. That he argued that religious belief was a by-product of some other trait created by evolution was interesting (although no mention of Stephen Jay Gould’s Spandrels?).

I’ve nearly finished Richard Dawkins’ The God Delusion. Very interesting, although I did find his discussion on the evolutionary roots of religion somewhat unconvincing. That he argued that religious belief was a by-product of some other trait created by evolution was interesting (although no mention of Stephen Jay Gould’s Spandrels?).

However, the whole meme thing was unconvincing. He covered the anarchist (and other socialist) argument that religion survives because of its utility to the powerful in about a sentence, before ignoring it in order to speculate on a biological reason. I can see that religion can tap into certain evolutionary traits, just as (say) the law (as Kropotkin argued) codifies our natural ethical perspectives and customs and adds to them laws which benefit the few. But to concentrate on the by-products of evolution rather than the social/class roots of religion is just missing the point and that is not the only thing (which misses the point in that book

But as I’ve written before, I do find Dawkins frustrating at times. It is also good to see that he argues that our ethical principles have an evolutionary base, which was what Kropotkin was stressing from the 1880s onwards! Unfortunately, Kropotkin seems to have slipped through the cracks in the scientific literature on mutual aid and evolutionary ethics (although most studies on mutualism do mention him). When he is mentioned, it is usually wrong or, at best, incomplete (as I’ve explored in some detail).

One thing which did strike me when reading The God Delusion was his comments, as a scientist, on the non-scientific nature of theology. As part of my work on An Anarchist FAQ I’ve had to become familiar with "Austrian" economics (via the critique of "anarcho"-capitalism). As I’ve been working on revising what an anarchist society could look like, I’ve had to look into the "Austrians" again (in terms of refuting the "economic calculation argument against socialism). So, yes, I tend to blog about things I’m thinking about as regards AFAQ rather than the merit or influence of the thing in question). Anyways…

I was struck by Dawkins’ arguments against religion and "Austrian" economics.

For example, Dawkins (rightly) dismisses a priori arguments, namely those "that rely upon pure armchair ratiocination" [p. 80] (which is the process of reasoning, or deducing conclusions from premises; deductive reasoning). This is what "Austrian" economics prides itself on. To quote von Mises, economic theory "is not derived from experience; it is prior to experience" and "no kind of experience can ever force us to discard or modify a priori theorems; they are logically prior to it and cannot be either proved by corroborative experience or disproved by experience to the contrary." So, from that process von Mises (and Rothbard, etc.) conclude that capitalism is the best economic system ever! As Dawkins says about religion, he has "an automatic deep suspicion of any line of reasoning that reached such a significant conclusion without feeding in a single piece of data from the real world." [p. 82] It is hard not to conclude the same about "Austrian" economics!

There is another link. Dawkins notes that "Fundamentalists know they are right . . . they know, in advance, that nothing will budge them from their belief . . . The book is true, and if the evidence seems to contradict it, it is the evidence that must be thrown out . . ." [p. 282] Compare that to von Mises:

 

"If a contradiction appears between a theory and experience, we must always assume that a condition pre-supposed by the theory was not present, or else there is some error in our observation. The disagreement between the theory and the facts of experience frequently forces us to think through the problems of the theory again. But so long as a rethinking of the theory uncovers no errors in our thinking, we are not entitled to doubt its truth"

 

So, in other words, "Austrian" economics is right — no matter what evidence can be presented — because it is based logical deductions from axioms which are, by definition, true. Capitalism is great because 2+2=4 does, to quote Dawkins, generate "an automatic deep suspicion of any line of reasoning that reached such a significant conclusion without feeding in a single piece of data from the real world."

Of course, the "Austrians" are more honest about their pre-scientific methodology. Most mainstream (neo-classical) economists are similar (as can be seen from their love of the invention of "perfect competition" and their desire to bring the real world closer to their surreal assumptions). And, equally, there are differences between religion and economics but, still, the parallels are so obvious it really does spring out at you… particularly their common utility to the powerful.

And need I say that real people suffer when the market is turned into an idol?

As I noted in my last blog (and so I’m repeating myself somewhat), the "Austrians" clearly see this is an opportunity for them to break-out of their marginalised position in the economic profession. The notion that it is the state (or central banking) which is the root cause of the current crisis is being raised in forums. For example, a few comments of this kind can be found on Steve Keen’s excellent new posting on credit (which contains the great line "Neoclassical economics — and especially that derived from Milton Friedman’s pen — is mad, bad, and dangerous to know").

In a way, this position is understandable — they must explain this crisis with the obvious argument — we do not have free market capitalism and so anything that happens in the real world has nothing to do with genuine free market capitalism (which exists only in their heads). Thus any problems we face now are due to the state and most definitely not due to the profit seeking activities of business men — unless they are bankers, of course, but even then it is all the fault of the central bank…

So, variations on that theme. Also, of course, they will be stressing that the state should do nothing, that wages should be cut (although the impact of that may not be what they hope), that people should be thrown out of their homes if they cannot pay the rent or mortgage, and so on. Once the collapse if finished, then the economy will bounce back better than ever but the pain is good for the economy — and serves you right for not worshipping at the idol of von Mises!

Of course, it is doubtful that anyone will find that particularly appealing — let it all collapse in order to build anew… It seems a guaranteed means for self-marginalisation (as if Austrian economics was not marginalised already). And, of course, the major sources of the crisis was precisely in the unregulated sectors, not that the regulation elsewhere was particularly enforced… but, then, ideological defences of capitalism tend to be useless when actually existing capitalism goes belly-up… Hence the ruling elite, as always, is seeking state intervention to keep the capitalist system going. Unlike ideologues, no ruling elite is going to let the source of their wealth and power (the economy) collapse.

This is not to say that central banks and credit expansion does not make a crisis deeper. Of course they do, but the roots lie in the nature of capitalism itself — namely wage labour, production for profit and inequality. The key problem with the "Austrian" theory is that it bases the crisis in banks artificially lowering the rate of interest from its equilibrium ("natural") price. This has three major problems:

1. It is in contradiction with their normal claim that equilibrium is a meaningless concept and unlikely to exist in reality. Except, apparently, in the banking industry (where it can be used to demonise the state for the failings of capitalism) and in the labour market (where it can be used to bash unions and such like).

2. It is in contradiction with their defence of entrepreneurial activity within capitalism. After all, why do banks artificially lower interest rates? To make money by meeting customer demand! It seems hard to blame the government when (as Minsky argues) such activity is a natural part of the entrepreneurial activities of the banks seeking profits.

3. It is also ignores that an interest rate, firstly, does not reflect the time preference of individuals and, secondly, even if it did, it is also the source of income for banks! Hence they have a market interest to act as they do, regardless of whether there is central banking or not.

Unsurprisingly, 19th century America was very unstable — after the civil war it was in recession as often as it was not. So in spite of more "free banking" in the nineteenth century than in the twentieth, the economy was fundamentally more unstable.

And what policy decisions flow from this analysis? That banks should be regulated ("free banking" would not stop banks acting as they do, for obvious reasons). Equally, forcing banks to keep a 100% reverse policy would mean the end of banking as we have known it (even giving loans would be next to impossible, as bad debts happen and who knows when savers may wish to withdraw their cash?). So, ironically, a few "Austrian" economists knew better than generations of banking entrepreneurs on how to run their business! And how would this be enforced? With minimum state capitalists, that is easy — the state does it. How about Rothbard’s private state system? Would market forces do it? It has not so far (after all, the state does not force banks to create credit). Perhaps they will be forced to regulate the banks as part of the monopoly "general libertarian law code" which all defence firms must subscribe to? And why a monopoly law code is different from a state is hard to see.

Rothbard does appeal to equilibrium analysis for "in the Austrian tradition . . . the entrepreneur harmoniously adjusts the economy in the direction of equilibrium" Elsewhere, he states that entrepreneurs "are trained to forecast the market correctly; they only make mass errors when governmental or bank intervention distorts the ‘signals’ of the market." He even attacks Joseph Schumpeter’s crisis theory because, in effect, Schumpeter does not show how entrepreneurs cannot predict the future ("There is no explanation offered on the lack of accurate forecasting . . . why were not the difficulties expected and discounted?"). Rothbard does not ponder why bankers, who are surely entrepreneurs as well, make their errors nor why the foresight of business people in an uncertain and complex economy seems to fail them in the face of repeated actions of banks (which they could, surely, have "expected and discounted"). And, of course, what stops the economy reaching unless, in part, it is the actions of entrepreneurs disrupting the economy? Particularly the collective outcome of such actions?

And I should also note that the "Austrian" theory was defeated during the business cycle debates of the 1930s, with von Hayek being refuting by Sraffa and then Kaldor (who was formally one of his supporters). Unsurprisingly, the "Austrians" tend not to mention this awkward fact… Similarly, as Sraffa noted, if the price of any good was different from its "natural" rate then you would get similar "malinvestment" as with the interest rate (particularly when business people take advantage of such differences in the search for profits? And need I note that, as with so many other things, the individualist anarchists of the 19th century knew how credit actually worked in a real economy?

This site has links to relevant articles on the subject, Krugman Right, and contains a link to an article explaining how the "Austrian" theory is subject to the Cambridge Capital Controversy. Which means that even in the highly unlikely situation that banks stop acting as capitalists (by means of regulation) then it is still wrong.

Perhaps, given the crisis and the calls for a New New Deal, the "Austrians" and other ideologues free market capitalism are arguing the original New Deal failed. Some have recently been pointing to the slump of the early 1920s (which helped break the unions, incidentally, which in turn ensured the rise of massive inequality through the 1920s which, in turn, helped the Great Depression occur). However, such a suggestion is, well, disinformation and a case of Harding’s Alleged Small Government Economic Miracle.

I suppose the central fallacy in the right-wing hatred of social democracy is the assumption that capitalism does not need state intervention to keep going. It does — and the response to slumps is a classic example of this (slumps also show a fallacy in von Mises’ arguments against communism, but I’ll leave that to another blog). Leaving capitalism to collapse in the hope that the economy will rebound quickly will tend to make people at the bottom question whether it makes sense to have a society which is regularly sacrificed to the great god "the market" (and, ultimately, those who run it). This does not mean that Keynesianism will work in the long term (it will not because of the increased power the working class has under full employment, which is why capitalism is marked by unemployment). It means that libertarians should be aware of the dynamics of state intervention and adjust our analysis, struggles and demands accordingly.

As for anarchists, well, I think our task is to encourage a few things. Firstly, encourage the questioning of capitalism as a viable economic system. Second, to stress that state intervention happens all the time, although usually for the few at the expense of the many. Thirdly, to encourage people to act for themselves and put pressure on their political and economic masters to act in their interests, not the few. Fourthly, to argue that helping people weather the storm of a crisis is not enough, we need to recognise that capitalism (along with the state which protects it) needs to go. Ultimately, if people act then there is the possibility of real change. If they leave it for politicians (or "the market") to fix things then the situation will get much worse before it gets better… and by then, well, despair is never a good basis for a social revolution…

In other words, we need to build organisations based on mutual aid — industrial unions (or their equivalent), co-operatives, credit unions, and so on. We need to occupy housing and workplaces, placing their use-value above exchange-value (so exposing the contradiction between use and exchange value at the heart of capitalism). If we do that then we can create a power which politicians cannot ignore — and which can create a new world.

And talking of mutual aid, Kropotkin gets a mention in this article Darwin Misunderstood. The author, Michael Shermer, is (strangely enough) a right-wing "libertarian" (or propertarian). So it seems that Matt Ridley is not the only one of them that likes to mention Kropotkin… But that, of course, does not change the fact that he is (partly) right: "Since that time science has revealed that species practice both mutual struggle and mutual aid. Darwinism, properly understood, gives us a dual disposition of selfishness and selflessness, competitiveness and cooperativeness." Yes, but need I say that Kropotkin was well aware that there was mutual aid and mutual struggle in species? For those interested, may I suggest (yet again) my article on Kropotkin’s Mutual Aid (hopefully forthcoming from AK Press later this year!). It also covers Dawkins ideas, which neatly brings me back to what prompted me to blog in the first place…

Until I blog again! Be seeing you…