Something that the Austrian community has not celebrated as much as one might expect is that the world’s most prestigious news magazine, The Economist, recently published some kind words about the Austrian school.
The Buttonwood column in the Nov. 18 issue starts by noting that the financial crisis has brought about a revival of the Keynesian school. Hyman Minsky’s reputation, too, has also soared. But:
In contrast policymakers seem to show a lot less interest in the economic ideas of the “Austrian school†led by Ludwig von Mises and Friedrich Hayek, who once battled Keynes for intellectual supremacy. Yet the more you think about recent events, the odder that neglect seems.
The article then proceeds to lay out how the Austrian business cycle theory underlies the commonly accepted explanation of the crisis as being caused by the Fed’s low interest rate policy from 2002-2005.
Towards the end of the piece, the question is raised whether the Austrians are as cogent on the cure for the crisis, as they have been in diagnosing its causes. Rightly so, the Buttonwood columnist notes that the Austrian position is not necessarily that of simply letting the necessary liquidation of malinvestments proceed without any monetary action. Friedrich Hayek did say that the central bank should respond to an economic collapse by increasing liquidity so as to make up for the decline in the velocity of money that invariably occurs – but only to make up for that decline and nothing more, a rule that Bernanke, Carney, et al have clearly violated.
The Austrian school was the reigning school prior to the Great Depression until the appearance of Keynes’ General Theory in 1936. It then went into obscurity, which only started to reverse with the awarding of the Nobel Prize in Economics to Hayek in 1974. The positive mention of the Austrian school in The Economist is a significant indication that the revival is gaining steam.
