Austrian perspectives

Steve.Keen at unsw.EDU.AU Steve.Keen at unsw.EDU.AU
Tue Sep 20 17:03:02 MDT 1994

Chris Sciabarra raised some very interesting arguments from the
Austrian perspective in his reply of some days ago. The first point
I would make in contrasting the two views is a bit of higher political
realism in Marx than the Austrian approach: whether or not the State
is the source of inflation (via the credit system), there's a certain
realpolitik that the Austrian preference--keep the state out of credit--
flies against the politics of the power of both state and finance to

Secondly, marx's analysis provides a reason to predict that there are
two price levels--one for assets, the other for commodities (in fact,
I can go one further and argue for three--assets, manufactured goods,
and raw materials). From that perspective, there is not one price
system but three, and rather than achieving coordination, a reliance
on a price mechanism alone will result in cycles, and dynamic
instability (though not necessarily breakdown).

Chris replied that the Austrian case is rather more complex than
he had space to describe it in his email post--a position I can
wholeheartedly accept--and he mentioned ideas of interlocking prices
for consumer goods, financial assets, etc. But he commented that in
a system running as the Austrians would prefer, the norm would be
deflation, rather than inflation. This is one point that returns to
one of Minsky's critiques: if deflation is the rule, then the real
cost of debt is increased--which itself has a deflationary implication
for current output.

Another point of difference is in the view of government:

     By contrast, the Austrians contend that it is precisely
`big government' which make the Great Depression - and
cyclical patterns in general - INEVITABLE in modern political
economy.  It is precisely `pure' capitalism that could
forever banish the cyclical patterns that have been observed
throughout economic history.

On the role of government in preventing breakdown, my case related
to its "fiscal" side, rather than monetary policy (though that is also
important: the state's preference during a crisis is to extent the
availability of credit--as we saw during the 87 crash. The private
sector, in contrast, reins credit in during a crash. The state's
"countercyclical" action is likely to prevent an immediate slump [though
it might also keep some "lame ducks" flying, as happened in Oz and as
Minsky accepts], while the private sector behaviour is almost certain
to turn a crisis into a slump). On the fiscal side, deficit spending
during a slump prevents the formation of a debt-deflation downward

I would not have called the level of government activity (on the fiscal
side) "big" during the Great Depression. If you consult Galbraith on
this, for instance, he claims (p. 7 of _The Great Crash_, from memory)
that when the US Government cut takes as a stimulatory measure, tax
on a middle income earner dropped about 60%--from about $50 a year
to about $20.

The point that:

"     The Austrians argue that system-wide discoordination of
prices is impossible in a free market.  "

is one I would also disagree with, mainly on chaotic analysis
grounds rather than as a dispute between Marxian and Austrian
analysis. Price setting in a real economy is a discontinuous,
multi-dimensional process. Such a process is almost bound to
be chaotic--in which case discoordination will be the rule.

To bring in another point from chaos theory, in my simple
model of Minsky, I use a few "stylised facts" that I think any
theory of economic would have a hard time disagreeing with:
that workers wage demands are stronger in booms than slumps;
that capitalists investment plans are bigger in booms
than slumps; that capitalists borrow from bankers to finance
investment; that bankers are sensitive to the level of current
debt when setting interest rates.

That generates a system where, with a "low" rate of interest
and a low debt sensitivity, the system settles down to a dynamic
equilibrium. However, with a higher base rate and/or higher
debt sensitivity, the system can develop a cyclical spiral
where capitalists are never able to stabilise the debt they
incur--they incur more during booms than they can pay off
during slumps.

The injection of a "Minskian" government--which taxes more
heavily during booms and spends more heavily during slumps--
provided a "homeostatic" balance to the system. No matter
what level of interest or debt sensitivity prevailed, the
system always settled down to a cyclical but stable path.

That is my key critique of a faith solely in the price
mechanism. Given that most if not all inputs into such
a system are going to be pro-cyclical, such an
unbalanced (dialectically speaking -:)) system is likely
to overshoot itself.

That said, there is much of merit in the Austrian analysis,
certainly as compared to the neoclassical, which was the
main target of my counterpoint exposition. I'm glad
Chris was able to elucidate them for us.

Steve Keen


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