Chicago School vs Austrian School

[Jacob_Orlove]

I was debating a couple of libertarians online, and quoted a few paragraphs by Frank Trollman about how flawed the Chicago School of economics is. They responded that they supported not the flawed Chicago School, but the pure Austrian School, which prescribes zero government intervention, and ideally zero government.

Frank, could I please get another rant to throw at these people, about the flaws in the Austrian School? It's so much easier than doing my own research, and the result is the same.

Anyone else who cares to weigh in, feel free.

[Surgo]

I've heard this one a lot. I have a good friend who I argue with a lot, who believes in the so-called "Austrian school". After arguing with him (and convincing him of a few points) and learning his ideas, I do not see how the Austrian school (if that's what his ideas can even be called) are any different at all from the Chicago school. Seeing as how government intervention is not a part of the Chicago school, at least from what I've seen, I don't see their point about government intervention as anything but non-sequitur.

Sorry, I'm not Frank and that probably doesn't help you, but that's what I've seen.

[Jacob_Orlove]

here's how he differentiates the two:

Chicago School economics is sort of a mixed bag - some government intervention is okay (Friedman wanted the Federal Reserve to keep a steady inflation of the monetary supply through good times and bad, with the option to inflate at will if desired - the Austrians think that central banking is a terrible idea and creates the business cycle on its own), but that's where you get "deregulation" from - which is of course a contradiction, since there will always be some regulation which is itself detrimental. What ends up happening is that the reins are loosened just enough to make for some really awkward manipulations by the connected in government; Madoff writ large. Lower taxes and less social spending are of course good things, since as a macroeconomy we've never been so rich as we were before the Progressive Era started (relatively speaking, in 1912 we had a huge portion of the world's gold supply without Europe having fought two World Wars - obviously the 1945-60 realm we had moar moneys but at the same time we were spending a huge chunk on economically worthless things like nuclear weapons), but any sort of regulation opens up for massive abuses.

...

Don't conflate the Chicago School, who also sees a massive role for government in the economy, with the Austrian School, which sees no manipulations and ideally no government at all. The former gets you 1929-45, the latter 1920-22 (you just don't hear about that recession even though the initial conditions were just as bad as 1929-31 because the Fed had the good sense to leave everything alone and so did the government - so it was awful for two years rather than 16).

[Smmenen]

I am neither a neo-classicist nor an austrian, but I can articulate some of the key differences. Some are visible in this essay: http://www.gmu.edu/departments/economic ... hyaust.htm

One key difference is that Austrians reject the heavy math methodology of the Chicago school. They think that their theory is rooted in reason (hence Mises "Human Action." He starts with the a priori premise that Humans Act. Because we act, we have time value. Since we have time value, there is such thing as time value of money. Etc, etc until they have built an entire economic theory). Also, they reject the whole notion of an equilibrium and equilibrium theory (i.e. calculus derivatives). They also have different theories of the business cycle


But there are also other major differences. Austrians are philosophically different. They are far more likely to be libertarian, and go against Republican orthodoxy. For example, they are very pro-immigration, anti-drug crimes, and also dislike war since it tends to enlarge the state. They view the state as the main evil.

Jacob shared Frank's essay. It does conflate the two schools, but his main point -- that it's a bunch of hogwash funded by the wealthy to justify their wealth and policies which protect and enhance it, is correct. Go look into who funds the Mises Institute. Another point, I attended a seminar at the Mises Institute, and in the lecture on the environment, the point was made that if global warming is happening, then the solution isn't to stop polluting, but to adjust our migratory patterns. We should move north, etc.

[Username17]

Ugh. Austrian School bullshit.

OK here's the deal: there's no such thing as an economy with no governmental intervention. By definition, whatever the biggest actor in the economy is is the government for such purposes. Even if the actual government were to vanish entirely like we see in areas like in Somalia and Afghanistan, then whatever church, gang, or big man was left standing is then the government. Whatever actions the Islamic Courts, the pirate captains, or Steve happen to take to influence economic futures then stands in for government economic intervention.

So their claim of "zero" government is laughable. Those places that we classify as not having governments still have one by the broadest of definitions, and every expenditure or wealth accumulation of those institutions is a government intervention of some kind. So really what they are saying is that the government should do very very little - like in the rocket powered economies of Somalia and Sudan. In this case of course we are talking about literal rockets that are presumably fired at resource convoys.

The Austrians look at a situation where the less government we have the crappier things are - for everyone - and somehow they walk away from this with the conclusion that our problems all stem from having any government at all. They are like malicious gardeners, who upon noting that the crops are shorter the less water we give them insist that the thing keeping our crops from growing to their fullest potential heights is that they are not kept entirely dry.

While it is of course impossible to prove the Austrians wrong to their satisfaction, since there has never been an economy run with no interference from authority figures within it and there never will be, it is blindingly obvious that their plans are stupid. As the limit of governmental economic intervention approaches zero we get famine, pestilence, gang violence, and ultimately political upheaval. The Austrian claim that if we set governmental economic intervention all the way to zero we would get rainbow sherbet and unicorns can be most charitably characterized as... "unlikely."

-Username17

[Smmenen]

The Austrian claim that if we set governmental economic intervention all the way to zero we would get rainbow sherbet and unicorns can be most charitably characterized as... "unlikely."

We can speak with more certainty on the consequences of austrian policy: it would be disastrous. The environmental example in my previous post is just the tip of the (melting) iceberg.

Another problem: Austrian economics has no answer to monopoly power, and therefore monopoly pricing (both product markets and labor markets). Even the Chicago schools would justify antitrust interventions, at least in theory. This is one of my major criticisms of the Austrians when I attended their seminars as an undergrad.

As I said in another forum:

Which is why the austrian's solution to this problem (fire dept, army, police) is to have private "security forces" paid through insurance pools.

It's totally insane.

The Austrians would return us to the middle ages, with feudal lords everywhere with their own private armies.

[Surgo]

Also, welcome to the boards Smmenen!

[Jacob_Orlove]

Thanks, Frank. That was exactly what I was looking for.

[Draco_Argentum]

They responded that they supported not the flawed Chicago School, but the pure Austrian School, which prescribes zero government intervention, and ideally zero government.

Back in school some of my mathematics textbooks would say "we can see that" and just skip out sections of stuff that the author believed was obvious but which a student might not see. I really hated that, the point of explaining something is to explain.

Despite that heres my explanation of why the Austrian School is wrong. We can see that it is retarded.

Why in the fuck does it require any form of rebuttal? Are you arguing with drooling retards for a reason?

[Username17]

The Austrians are in fact crazier than the Anarcho-Syndicalists. The anarchists can demonstrate their principals creating successful small and medium scale communes which produce surpluses and trade with other economic actors and they can make a rather compelling argument that all major producers in the economy should be run as anarchist communes that trade with one another to provide the goods and services everyone needs. Indeed, the theory doesn't really fall apart unless and until someone decides that their anarchist commune is going to be a "pirate ship" that produces the services of "taking all your shit at gun point." You really legitimately need some kind of authority figures to respond to that kind of coercion as well as a safety net to prevent people from becoming desperate enough to do that in the first place.

But while the Anarcho-Syndicalists have a system which straight up won't work - they do have a point. And indeed they can create real model economies that follow their ideals and function beautifully. Frankly, a well run global economy should probably have a certain amount given over to Anarcho-Syndicalist production methodology. It really is amazingly efficient at some things (most notably things that have minimal on-site administrative requirements like agriculture).

And the Austrians can't say that. They can't demonstrate one tiny solitary success anywhere on Earth at any point in history. Having no economic plan has demonstrated time and time again that it is just as dangerous as not having a fire evacuation plan or not having a hurricane response plan. Being caught without a plan is no less damaging than being caught without appropriate safety equipment in any other dangerous circumstance - and overproduction, waste, pollution, exploitation, and shortage are no less destructive than fire or snow.

There is no scale large or small in which Austrian policies have ever or can ever be shown to be effective. Because unlike most other economic fundamentalists such as Anarcho-Syndicalists, Neo-Tribalists, Fascists, Maoists, or Bolsheviks, the Austrians don't have a point. It's a fractal of failure with just new and more intricate failure all the way down.

-Username17

[Neeeek]

I was debating a couple of libertarians online, and quoted a few paragraphs by Frank Trollman about how flawed the Chicago School of economics is. They responded that they supported not the flawed Chicago School, but the pure Austrian School, which prescribes zero government intervention, and ideally zero government.

Frank, could I please get another rant to throw at these people, about the flaws in the Austrian School? It's so much easier than doing my own research, and the result is the same.

Anyone else who cares to weigh in, feel free.

My version: I'm not all that fond of violence. And that system flat-out demands it. Ignoring, for the sake of simplicity, Frank's point that whatever is in charge is the de facto government (which reminded me of a bit from one of the Myth books where one of the mob guys, upon being told he'd be patrolling their "insured" areas, strenuously objected to being a cop), a system that eliminates any sort of outside restriction on the behavior of people is just plain asking for it. It's not that I don't have faith in people in general, it's that all it takes is one person or group deciding to play unfair, and suddenly everyone has to, just to keep up.

See, here's the thing: The main problem with most ideologue-based policies is they simply don't work. The American right-wing's ridiculous notion that the poor are lazy and deserve what they get is stupid. Regardless of whether or not it's true, because policies based on rewarding the successful and punishing the unsuccessful are inherently flawed. They move money into the hands of the few who can't sustain a level of consumption to maintain the economy. Besides, being successful should be reward enough.

[cthulhu]

Saying all Austrian's are in favour of no government is missing the point, many will say you need a government to do law and order and national security, and focus on other stupid things like:

To increase stability we need to abolish the federal reserve (an organization that was created to increase bank stability, and the time prior to its creation was marked by instability)

Ending fractional reserve banking to increase the supply of credit.

Other contradictory ideas like that!

[Lago PARANOIA]

But Frank, in the short term Austrian economics totally fill the pockets of the rich with tons of money.

Capital which they can use to transfer to some other still-working economy. Or they just croak with their money and wimmens. Hey, they got theirs.

[Username17]

Yeah, I love how these guys seriously say that we need to go back to the pre-1913 US policies. Other than the rampant corruption, the slavery, the genocide, the literal Wild-West style shootouts in the street, the starvation, and the 23 year long recessions, I'm sure it was fine.

-Username17

[Gelare]

Another problem: Austrian economics has no answer to monopoly power, and therefore monopoly pricing (both product markets and labor markets). Even the Chicago schools would justify antitrust interventions, at least in theory. This is one of my major criticisms of the Austrians when I attended their seminars as an undergrad.

I'm not clear on whether the Austrian School wants no government because governments are guaranteed to be incompetent and wasteful, or on some other principle, because then it just becomes a question of how incompetent and wasteful. What I do know is that the Chicago school, while not diametrically opposed to antitrust interventions, doesn't like it. The reason is that monopoly is a self-correcting problem - excess profits create incentive to enter, so monopolies sow the seeds of their own demise. Whether they would cause more deadweight loss if they went away naturally or if you introduced the whole system of antitrust law is an open question, but most peoples' arguments for a monopoly's ability to maintain its monopoly power are bullshit.

[RiotGearEpsilon]

Just because a monopoly self-corrects EVENTUALLY doesn't mean that it won't cause immense damage on the way down. We don't want that to happen.

[Heath Robinson]

In the long run a monopoly is an unstable situation. That's certainly possibly true (Monopolies tend to fight pretty hard against interlopers). In the long run, however, we are all dead.

I just had to use a variation of that line once in my life to feel complete.


Monopolies maintain their own power by being able to absorb greater losses than its opponents and therefore win a game of "whoever reaches the bottom first" with them, being able to outright purchase competitors or setting the effective barriers to entry so high that nobody bothers to compete. Which of these is bullshit and why?

[Gelare]

Just because a monopoly self-corrects EVENTUALLY doesn't mean that it won't cause immense damage on the way down. We don't want that to happen.

Absolutely correct. That's why I added,

Whether they would cause more deadweight loss if they went away naturally or if you introduced the whole system of antitrust law is an open question

Monopolies maintain their own power by being able to absorb greater losses than its opponents and therefore win a game of "whoever reaches the bottom first" with them, being able to outright purchase competitors or setting the effective barriers to entry so high that nobody bothers to compete. Which of these is bullshit and why?

The first one definitely, the second one mostly, and the third one partially. Seriously.

The first is called "predatory pricing", and has occurred many times in the history books, but rarely, if ever, in reality. If you're a huge company that does a lot of business, and you engage in predatory pricing to drive out a smaller competitor who does, say, a tenth the business that you do, you're welcome to try that. The fact that you do ten times the business means you'll burn through your cash ten times as fast. Way to go. Even if this succeeds, there's no reason why someone else won't come along tomorrow and force you to repeat the process, squandering all your monopoly profits into nothing.

The second one involves horizontal mergers. This does work in the short run, sure. The big company eats the small company and monopolizes the market - for a while. But if they're monopolizing the market, they're getting monopoly profits, which will prompt more firms to enter the business, which the monopolist will then have to buy to keep his monopoly profits, which will prompt more firms to enter the market, which...
Eventually, the monopolist is going to lose. Not immediately, and this is an example of where it's worth considering whether it's more economically efficient to allow the monopoly to dissolve naturally or set up antitrust action. But eventually, the monopolist is going to lose.

The third one involves barriers to entry, which are absolutely a way that fewer firms are going to enter the market. Some markets have really high natural barriers to entry, such as the business of supplying electricity or water, because there's huge fixed costs in setting up the power grid or pipelines, and so forth. In these cases, you wind up with natural monopolies, which the U.S. government regulates, to what research shows is mixed results compared to leaving the natural monopolies unregulated. Another case of sometimes better, sometimes worse.
But you're not talking about natural monopolies, you're talking about monopolists conjuring barriers to entry from thin air. This has been tried, and can work somewhat in the short run, but the allure of monopoly profits is going to bring competitors who can overcome those barriers, plus the monopolist wasted all that money setting them up in the first place.

So yeah. Monopolies, self-regulating in the long run. Maybe worthy of government intervention, maybe not. Sorry about the bricks of text, folks.

[Username17]

The reason is that monopoly is a self-correcting problem - excess profits create incentive to enter, so monopolies sow the seeds of their own demise.

Ask a Chicago School proponent whether Unions are a self correcting problem. Let's use exactly the same logic:

See, a Union causes the value of the skill set of the unionized workers to go up. And that encourages people to get training in that area of expertise, which then increases the number of people competing for those jobs, which weakens the Union. See? "Problem" solved, through the magic of the invisible hand! And all we had to do was wait for an entire new generation to grow up and go to school for wage values to equalize.

So obviously all the time that the Chicago School guys spend speaking out against Unions is pointless. Just ignoring the unions will allow the invisible hand to normalize wages.

The entire argument is stupid. It's just saying that every thing ends and everything dies, so there's no reason to bother fighting any particular thing you don't like. It's absurd on the face of it. No tyranny has ever persisted longer than three generations, so there's point in fighting for your rights or freedom. The longest lasting government on the planet collapsed last year when the Kingdom of Nepal ceased to be - so clearly there's no point trying to get involved in or changing your government because it will all end on its own no later than when the sun runs out of hydrogen and becomes a red giant in a giant fireball that turns every living thing on Earth into a uniform plasma.

---

A monopoly is a government. It governs the production of whatever it is a monopoly of. It has how ever many resources and how ever many people it can acquire while it is in power. Anyone attempting to break into that industry must overcome those resources turned against them. A more successful monopoly is of course more appealing to compete with (because there are more profits to be reaped by getting a slice of the pie), but it also has more resources to oppose potential competitors.

Similarly,when a country is doing well a lot of people want to be the ruler of it. How many people want to be President of the United States or Chancellor of Deutschland? And when a country is a pathetic basket case, less people want in on that action. Honestly, I wouldn't be willing to move to Gaza to be president of it and it would take a lot of coaxing to get me to lead Zimbabwe. But of course, the stronger nations take a lot of effort to lead. You need millions of dollars and millions of supporters just to get the chance to be the leader of the USA - and only for four years at time even if you win. Apparently you could be the god king of Fiji with a thousand men with guns.

And thus it is that everything ultimately ends. More desirable prizes require more powerful opposition to take down, but their status as more desirable prizes incites more powerful opposition to turn their sites on them. But to say that it is somehow OK for things to exist just because the lava lamp of chaos and the ever smoldering fire of time will eventually destroy them is straight madness.

-Username17

[Gelare]

See, a Union causes the value of the skill set of the unionized workers to go up. And that encourages people to get training in that area of expertise, which then increases the number of people competing for those jobs, which weakens the Union. See? "Problem" solved, through the magic of the invisible hand! And all we had to do was wait for an entire new generation to grow up and go to school for wage values to equalize.

So obviously all the time that the Chicago School guys spend speaking out against Unions is pointless. Just ignoring the unions will allow the invisible hand to normalize wages.

Well...yes, that sounds completely accurate. A powerful union will create incentives for firms to hire scabs at lower wages, which will weaken the power of the union, cause it to dissolve, and return to the competitive equilibrium. I don't see any theoretical inconsistency there. Now, there's a lot of political nonsense going on around unions, which, I must confess, I'm not as well versed in. Certainly, if the government endorses unions, or forces companies to hire them or forces new employees to join them or any of that, it'd inefficiently magnify the union's power.

Heck, maybe those Chicago School folks are being good citizens. After all, unions, which are monopolies on labor, cause deadweight loss, like all monopolies. Since unions are easier to spot and regulate than other monopolies (since it's often actually really hard to determine if a company is engaging in anticompetitive behavior or whether it does, in fact, constitute a monopoly in the relevant market), maybe the Chicago School folks are just trying to promote efficiency.



Somehow, I doubt you'd think so. But it's theoretically plausible.

[Heath Robinson]

The first one definitely, the second one mostly, and the third one partially. Seriously.

The first is called "predatory pricing"... The fact that you do ten times the business means you'll burn through your cash ten times as fast...

The Monopoly need not push themselves into negative profit margins because the Monopoly tends to have advantageous economies of scale. Their profits temporarily fall in the markets containing competitors but the competitors are driven out of business and markets which do not contain competitors continue to produce supernormal profits.

If the Monopoly does not have economies of scale, they still tend to have large built up savings and other streams of revenues from markets outside the intruder's grasp.

The second one involves horizontal mergers...
Eventually, the monopolist is going to lose...

Eventually we all die. That's no argument to let people kill each other with no consequences.

Successful monopolies have a tendancy to be capable of bringing overwhelming force to the table unless the intruder happens to be supported by another major force from outside the area of influence of the monopoly. If the intruder is supported by another major force, it's the accumulation of monopoly power into one huge company that is even worse for the consumer.

The third one involves barriers to entry...
But you're not talking about natural monopolies, you're talking about monopolists conjuring barriers to entry from thin air...

Barriers to entry have been conjured from thin air. Green belts were lobbied for by landlords. Whilst not monpolies, this does demonstrate that you can raise barriers from "thin air".

Monopolies are often profitable enough to manipulate the political and legal situation to their advantage. It's not a conspiracy theory - it's pretty much fact that companies, at the very least, donate money to political candidates that are likely to implement policies that favour them. At the worst, political candidates and parties make concessions to businesses that donate as a way of soliciting campaign donations.


Monopolies may be good or bad, but I'm quite sure that the majority of them are bad.

[cthulhu]

So yeah. Monopolies, self-regulating in the long run. Maybe worthy of government intervention, maybe not. Sorry about the bricks of text, folks.

Except if we talk about natural monopolies, in which case there is a fairly hefty body of evidence that they arn't, and the short term damage may be huge. Consider the world banks report about the IMF's efforts to privatise water infrastructure in africa that lead to price gouging and the end of effective water services in those areas.

[Gelare]

The Monopoly need not push themselves into negative profit margins because the Monopoly tends to have advantageous economies of scale.

If the monopoly has advantageous economies of scale, it should not surprise anybody that they are able to outcompete their less efficient competitors. That's not even a problem. Either some company needs to be started up at minimum efficient scale, which is totally possible and fine, or this industry is efficient as a natural monopoly, which you can either regulate or don't, depending on how competent your bureaucracy is.

Their profits temporarily fall in the markets containing competitors but the competitors are driven out of business and markets which do not contain competitors continue to produce supernormal profits.

No. Good try, but no. Just because I have a monopoly in A doesn't mean I have a monopoly in B. If I do have a monopoly in A and I'm engaging in predatory pricing to try to get a monopoly in B, I'm wasting my monopoly profits, whereupon you can use the earlier argument against predatory pricing where the competition produces A and B.

If the Monopoly does not have economies of scale, they still tend to have large built up savings and other streams of revenues from markets outside the intruder's grasp.

There's no reason why every one of those things can't apply to the competition - large amounts of start-up capital, being primarily based in other markets, etc.

Eventually we all die. That's no argument to let people kill each other with no consequences.

Yeah, you're totally right. I'm sure not saying that we should let monopolies run rampant. But I live in a country that has recently run out of numbers on the National Debt Clock. By all projections, my generation is going to buckle under the absolutely ridiculous strain of all the Baby Boomers receiving Medicare and Social Security, so forgive me if I don't have a ton of faith in the ability of my government to regulate economics.

Barriers to entry have been conjured from thin air. Green belts were lobbied for by landlords. Whilst not monpolies, this does demonstrate that you can raise barriers from "thin air".

Monopolies are often profitable enough to manipulate the political and legal situation to their advantage. It's not a conspiracy theory - it's pretty much fact that companies, at the very least, donate money to political candidates that are likely to implement policies that favour them. At the worst, political candidates and parties make concessions to businesses that donate as a way of soliciting campaign donations.

So what you're saying is that getting more government involved makes the situation worse. Glad we could establish that.

Monopolies may be good or bad, but I'm quite sure that the majority of them are bad.

Yup, no contest. The question is, are they worse than government intervention? Probably, yeah; but not necessarily.

[Username17]

So what you're saying is that getting more government involved makes the situation worse. Glad we could establish that.

You aren't up on the Digger Rebellion, are you? When the government looked the other way, the landlords used their superior war chest to hire actual mercenaries to murder land competitors.

Without the intervention of government, you can't compete with the powerful in an economic contest at all. They will literally just have you killed. Whoever has the monopoly of force will be able to use it against anyone who competes with them. If that's the government, then it is very difficult to overthrow the state by force of arms. If that's not the state, then you get to live in a shiny new Banana Republic. Whether you like it or not.

Then you get to work for however long United Fruit tells you to work for as much money as United Fruit feels like giving you and if you refuse or try to grow your own fruit you get shot in the face.

-Username17

[Gelare]

@Frank: Can't really argue with that. Economic theory doesn't usually take into account stuff like getting shot in the face. I feel like I should probably stress that at no point did I say there should be no government, because all that stuff Frank said is totally true, and I'm pretty sure the Chicago School doesn't say that either. But just because Microsoft is overcharging you for their buggy operating system doesn't necessarily mean it's a better solution for the government to step in and break them up into itty bitty bits.

Except if we talk about natural monopolies, in which case there is a fairly hefty body of evidence that they arn't, and the short term damage may be huge. Consider the world banks report about the IMF's efforts to privatise water infrastructure in africa that lead to price gouging and the end of effective water services in those areas.

Natural monopolies are self regulating, in the sense that it is the most efficient for there to be a natural monopoly. I'm not up on the literature regarding developing economies, and those kinks in standard economic theory, which are usually called "reality", tend to mess things up further in developing economies. But in the U.S., for example, there was a report that looked at levels of regulation of utilities (natural monopolies) in the many states and there was no significant efficiency gain from regulation.