Wolf in Austrian Lamb’s Clothing

Martin Wolf, who started blogging, posted on “Does Austrian economics understand financial crises better than other schools of thought?” He had this to say regarding Austrian Economics:

Yet some would argue that economists working in the Austrian tradition were more nearly right than anybody else. In particular, they have argued that: inflation-targeting is inherently destabilising; that fractional reserve banking creates unmanageable credit booms; and that the resulting global “malinvestment” explains the subsequent financial crash. I have sympathy with this point of view.

In his short blurb, Wolf is unwilling to accept the Austrian prescription to cure the crisis.

It was interesting that he was willing to explicitly criticize “conventional neo-classical equilibrium economics” (whatever he means by that), while unwilling to criticize Keynesianism or Monetarism:

I think we can say that conventional neo-classical equilibrium economics did a poor job in predicting the crisis and in suggesting what should be done in response. We can also say that neo-Keynesians pointed out some important precursors of the crisis, in particular, the destabilising role of huge private sector financial deficits in countries with large external deficits, such as the US, and the Keynesian view certainly played a big part in the post-crisis response, as did that of Milton Friedman.

The promising title of Wolf’s article proves to be little more than an unsatisfactory come-on. While he alludes to the fact that Austrians have a better understanding (“were more nearly right than anybody else”), he cannot bring himself to accept either their prescriptions or reject the mainstream schools that created the mess. Perhaps he would alienate too many friends in the profession.

The article is worth reading only because of its vacuity and the hoops Wolf goes through not to criticize the schools directly responsible for the crisis.

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