I wrote this post almost over 5 years ago. Sometimes I like to sit on them for a while, and sometimes they get lost in the mix. I’ve thought about these ideas quite a bit over the last 5 years, but I still like what I wrote then.
Austrian economists look to Nobel Prize winner Friedrich Hayek, who learned his economics in Vienna in the 1920s, for their inspiration.
Austrianism has been a growing wave in economics over the last generation. It is especially popular at the consumer level in Utah.
Much of their attack focuses on macroeconomics generally, and Keynesians specifically. The basic position is that there is no “macroeconomy” but rather just the collection of data at the aggregate level. Just because you can collect data about, say, the U.S. as a whole, doesn’t mean that there is a coherent theory that does, or ever will, apply to the U.S. as a whole.
Here’s is Horwitz’ expansion on Don Boudreaux’s original metaphor (quoted nearly in full):
… Don Boudreaux compared the economy to a giant jigsaw puzzle with billions of pieces that can fit together in numerous combinations only a small number of which produce a meaningful pattern or picture. We learn which combos work because they “beep” every time we get one “right” and those beeps give us pleasure. I like that metaphor and I want to make use of it to talk about Austrians, Keynesians and stimulus spending.
Imagine that we do what Don describes and start constructing this jigsaw puzzle, but rather than the beeps reflecting combinations that create meaningful patterns, imagine that the beep mechanism is suffering from a computer virus that leads it to commit both Type I and Type II errors. The result is that we end up creating a puzzle that sees no meaningful image emerge … Suppose further that we eventually use up all of the pieces and discover we have wasted our time because there is no meaningful picture to be found.
What happens next? For one thing, we have to spend some time pulling the puzzle apart as what we’ve created produced no meaningful picture. Then we’d want to fix the bug in the beeping mechanism. And then we’d want to get back to the task of building a puzzle that did create a meaningful pattern. Of course this extension of Boudreaux’s metaphor is designed to mimic the Austrian theory of the business cycle, though somewhat imperfectly.
Now suppose we are in the process of dismantling the old puzzle. Suppose further that as we pull pieces apart, we have to wait for a beep to inform us that doing so was a good “pulling apart.” Once we know we have correctly dismantled, we can try to “re-fit” those pieces into the puzzle. As we engage in this process, there will be a bunch of pieces that are sitting around waiting to be “re-fit” into the puzzle, ideally generating a true beep and helping create a meaningful picture when re-fit correctly. Of course if we’ve really fixed the beep mechanism, these “pieces in waiting” will grow at first as we do more dismantling than reconstructing, then shrink as those reverse.
So while the Austrian puzzle observers nod approvingly as the dismantling and reconstruction continues slowly but effective onward as puzzle makers learn from the beeps, along comes their friend the Keynesian. The Keynesian bemoans the fact that there are so many puzzle pieces sitting “in waiting.” He says “wouldn’t things be better if we just starting putting those pieces into the puzzle in any old way? Even if we don’t get a meaningful pattern, at least we’d use up all the pieces. After all, isn’t that how you know you’ve reached the goal of a finished puzzle?”
The Austrians respond by saying “No, the point isn’t to just use all the pieces. That’s easy to do, but it’s not the challenge of this kind of jigsaw puzzle. The challenge here is to produce a meaningful pattern without having a picture on the box, and which might not require all of the pieces to be used, because the meaningfulness of that pattern derives from the way in which the organization of the pieces matches what puzzle demanders want in a picture even though they cannot articulate it ahead of time.”
Now it’s true that puzzle pieces are not human beings, but the underlying contrast of visions here seems to me to capture the debate. The argument for stimulus spending by Keynesians amounts to saying we need to activate idle resources either without thinking about whether the puzzle pieces actually fit together or, more subtly, not thinking about, or not caring about, whether they produce a meaningful pattern. The point is just to make sure they are being “used.”
The former (not thinking about whether they fit) reflects a problematic view of capital (capital as play-dough, rather than Legos), and the latter is a deeper issue about what constitutes economic welfare, particularly in the long-run. The Austrian emphasis on the meaningfulness of the pattern is a reflection of our insistence that it’s all, ultimately, about microeconomic coordination and that aggregates such as GDP or even unemployment are not the central issue for judging success. By recognizing that sustainable growth only comes when the puzzle pieces actually fit together and make a meaningful pattern, Austrians have a way to criticize the stimulus crowd’s insistence on the importance of making use of idle resources. The point of an economy is not to have every person and machine working but to deliver what consumers want – i.e., to make a meaningful pattern.
Trying to jam all the pieces in where they don’t fit will not create sustainable growth because it does not create a meaningful pattern. It’s only going to necessitate pulling apart and re-fitting later. You don’t “solve” the puzzle by using all of the pieces; you solve it by using as many pieces as necessary to generate a meaningful pattern and picture. Getting such a pattern to emerge requires the decentralized coordination generated by the microeconomic discovery process, and that process is obscured when our focus is only on aggregates and getting resources into use. In words that have now come to supersede the original: “too much aggregation ignores human action and motivation.”
Stimulus spending advocates seem to treat the jigsaw puzzle of the economy as if the goal is to use all the pieces, without much concern about whether they fit together properly or if the combinations make a meaningful pattern. For Austrian critics, the fit of the pieces and the pattern they create is what ultimately matter.
I spent some of Friday afternoon at Whittlesticks (my son takes bass lessons there). On the counter was one of those wooden puzzles with odd shaped pieces: you had to assemble them into a tetrahedron (like a pyramid, but with a triangular base) inside a flat frame.
I hate these puzzles.
But, I’m compelled to try them, and fail.
This is very much like this metaphor.
Austrians view success as building something that works, even if it isn’t finished. In my case, I couldn’t build a tetrahedron, but I could build part of it, which I left on the counter for the next person.
Keynesians view success as whether or not all the pieces are on the frame, and failure as leaving some of the pieces on the counter. Whether any stable shape is constructed is irrelevant.
I can carry this one step further to Keynesians in government.
What if I brought a bunch of these puzzles to class? (Not that I have that kind of money, so do what economists do: assume a puzzle for everyone). Then students had to solve them. An Austrian would view any structure at all as a success. A Keynesian would view any use of all pieces as a success.
My guess would be that 1) some fraction of students would finish with some minimal structure, 2) some students would pile all the pieces onto the board in frustration (or try and submit a puzzle solution that was defective), and that perhaps 3) a small handful of people would complete the puzzle.
Policymaking advocates — a wide-ranging group including many academics, most politicians and bureaucrats, much of the legacy media, and other various people in NGOs that favor centralization of control — assert that virtually all methods of selecting a government yield people exclusively from the third group.
I tend to doubt that.
And what have we learned over the last 5 years.
Well, the economy has recovered a lot, and continues to recover. Pretty much like macroeconomists said that it would, whether or not Obama passed a stimulus package.
The question is, has it improved more than it should or less than it would have otherwise?
That’s a tough thing to measure. But, this expansion is now on the long side, but also on the weak side. As a matter of fact, we’ve never had one this long be this weak.
I think that’s pretty good evidence that the stimulus package was a waste of money, time, and effort.
On the other hand, American faith that the Federal government is the solution to their problems seems to still be waxing.
Perhaps Obama made a good bet, and progressives have won with it: if the economy is going to improve anyway, pass a stimulus package so that you look active, and then claim the credit when things improve.