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Is there an Austrian macroeconomics?

There are macroeconomic questions, but only microeconomic answers.

(Roger Garrison)

A book that purports to explore 'Austrian macroeconomics' has a bit more than the usual burden of self-justification. In the eyes of many economists, Austrians are seen as rejecting the whole concept of macroeconomics in favor of a focus on microeconomic phenomena such as price coordination and entrepreneurship. There is some truth to this perception. In a great deal of the post-revival (i.e., since 1974) literature in Austrian economics, Austrians have tried to define themselves in terms of their methodology (subjectivism) and their understanding of the market as a competitive discovery process rather than as tending toward, or mimicking, general equilibrium. Austrians' self-described 'uniqueness' has almost exclusively been focused on microeconomics.1 Even Hayek, in his last book, referred to macroeconomics in sneer quotes (1988:98-99), suggesting that a rejection of the subdiscipline was still alive and well in some Austrian quarters. It comes then as little surprise that much of the microeconomic and methodological work in the post-revival literature in Austrian economics finds its roots in Hayek.

Bruce Caldwell (1988), among others, has pointed to Hayek's seminal paper 'Economics and Knowledge' as the turning point in Hayek's self-understanding of his own views on economics and as defining the approach that the post-revival Austrians would follow. Caldwell argues that it was Hayek's participation in the socialist calculation debate in the 1930s that led him to rethink the relationship between knowledge and equilibrium in order to criticize the equilibrium-oriented neoclassical mainstream. To the extent that Hayek's work on knowledge and equilibrium has defined the development of contemporary Austrian economics since, it also explains why recent, consciously Austrian, scholarship seems so centered on microeconomics and methodology.

However, there is a second side to this story that needs to be told. As Caldwell and others such as Foss (1995) have also noted, Hayek's participation in the macroeconomic debates of the 1930s was also important to how he saw himself and the tradition he was working in. Foss argues that Hayek's concerns with knowledge and equilibrium can be seen as early as his 1933 paper 'Price Expectations, Monetary Disturbances, and Malinvestments', which attempted to clarify his position in his controversies with Keynes, Sraffa, and others in the LSE-Cambridge debates of that period. One could plausibly argue that Hayek's difficulties in convincing his opponents in both the debate with Keynes and the debate over socialist calculation derived from differences over the role of equilibrium theory, their understandings of market adjustment processes, and the role and nature of knowledge in economic interaction. The question of what implications these latter issues have for a more completely developed Austrian macroeconomics have yet to be fully explored.

Hayek's 'pre-Keynesian' macroeconomics was not left to die on the vine. Although not much discussed in self-consciously Austrian books, there is an Austrian macroeconomics that is alive and well. There are three distinct issues that Austrian macroeconomists have been pursuing in the post-revival years. First are the extensions of the Mises—Hayek theory of the trade cycle (e.g., Garrison 1993; Butos 1993; and Cowen 1997). Second is the recent interest in the idea of 'free banking', or a completely market-driven monetary system. Not all of the contributors to the free banking literature would consider themselves Austrian, but many of their ideas and arguments have a distinct Austrian flavor. For example, George Selgin (1988a: chs 3-6) has examined the relationship between the institutions of a free banking system and macroeconomic theory and policy, particularly in the context of the 1930s debates about neutral money and price level stabilization. Third, and arguably even less explicitly Austrian, is the work of Leland Yeager, Axel Leijonhufvud, and Robert Greenfield that has tried to revive interest in the pre-Keynesian monetary disequilibrium theorists, or what Yeager sometimes calls the 'early American monetarists'.2 Some contemporary Austrians have taken an interest in these ideas and attempted to show how they too have something of an Austrian pedigree. In addition, elements of the Austrian cycle theory and monetary disequilibrium theory can be found in the closely related work of W. H.Hutt (1975, 1977 [1939], 1979). Hutt pays explicit attention to the relationship between macroeconomic disturbances and price coordination, which will be central to this book's theoretical perspective.

My major goal is to tie together these three strands into a more systematic presentation of what an Austrian macroeconomics might look like. In the broadest sense, I hope to show that traditional Austrian cycle theory work is strongly compatible with the Yeagerian monetary disequilibrium perspective. Each is describing one possible scenario where monetary equilibrium does not hold: the Austrians focus on inflationary disequilibria, while the monetary disequilibrium theorists focus on deflation. These two theories are largely mirror images of each other, and their commonalities can better be seen by linking them both with explicitly Austrian microfoundations and the monetary equilibrium theory tradition.

Rather than simply work around the aforementioned Austrian emphasis on the market as a discovery process, I intend to incorporate these insights into my discussion as my 'Austrian microfoundations'. I wish to reconnect the most recent work in Austrian microeconomics, (discussions of disequilibrium, coordination, entrepreneurship, monetary calculation, the role of institutions and the epistemic function of prices) with the ongoing developments in Austrian macroeconomics (the three strands mentioned above). Karen Vaughn (1994) rightly, in my view, points to these microeconomic issues as outlining the path Austrian economics should take in the next century. If so, the relationship between those microfoundations and modern Austrian macroeconomics needs to be explored.

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