On Ron Paul and Economics (via latimes.com)

It’s about time people started taking notice of this guy:

For three decades, Texas congressman and former presidential candidate Ron Paul’s extreme brand of libertarian economics consigned him to the far fringes even among conservatives. Not a few times, his views put him on the losing end of 434-1 votes on Capitol Hill.

No longer. With the economy still struggling and political divisions deepening, Paul’s ideas not only are gaining a wider audience but also are helping to shape a potentially historic battle over economic policy — a struggle that will affect everything including jobs, growth and the nation’s place in the global economy.

via Ron Paul’s ideas no longer fringe – latimes.com.

I really like Ron Paul. While I don’t agree with him 100%, I at least come away with the notion he can be reasoned with and he will listen to reasonable people. But it’s about time people started paying attention to some of the things he has to say on the economy.

And if you want to understand his views, you need to go to the work of Ludwig von Mises, who had his own thoughts and philosophy on the nature of markets and economics after the Wiemar Republic hyperinflation in 1920’s Germany. Along with von Mises came other Austrian economists,  with Friedrich Hayek probably being the most notable. The basic tenets of Austrian economics include money that is backed by something (gold being the obvious choice), strict limits on credit expansion and growth of the money supply.

Taken together, it’s all a prescription for slow, but relatively stable, economic growth. The Austrians never promised an end to booms and busts in the economic cycle, far from it. They presumed booms and busts were inevitable. But through tight controls on the expansion/contraction of money and credit, the effects of booms and busts can be muted. Also, they believed government intervention tended to do more harm than good, and there’s ample evidence of that from Nixon’s price controls to the failure of collectivist/centrally planned economies to the current default risk of Greece, Spain, and Italy.

I didn’t learn about Austrian economics in college. They only taught us from the teachings of Keynes and Friedman, but even Friedman-based teachings on money and banking were electives. And since I don’t think Maryland’s curriculum is that much different than other colleges, that tells me we’re just educating generation after generation of Keynesians, whose policies failed to deal with stagflation. From the ’70s. Yet we still listen to them.

Why?

I don’t know. But I stumbled across this post on Paul Samuelson, who died last month, on the perceived failings of von Mises and Hayek:

One of their drawbacks for Samuelson is that they eschewed the mandarin perspective that an advisor to presidents found congenial. Another was probably that they wrote almost exclusively in English instead of math.

The appeal of math for a practitioner of what we might call mandarinomics is clear: By excluding nonmathematicians from the dialogue, it helps elevate the economics you practice to the esoteric status enjoyed by pure sciences like physics.

That seems like a very plausible explanation to me. Because at its core, economics deals much more with the study of people than the study of physical systems like the effects of gravity and chemical reactions. But where guys like Keynes “succeeded” is in putting some of the relationships we have learned about on graphs and writing down some math equations to “explain” all of these things. By doing this, the “science” of economics gets elevated.

The problem is, those little graphs haven’t always held to be true and those little math formulas have been disproven. The relationship between inflation and unemployment is not as concrete as the relationship between temperature and atmospheric pressure. Explanations of economic phenomena fall in and out of vogue all the time. Whereas in science, Newton’s work is still relevant the last time I checked.

We’re at a crossroads, as the LA Times article points out. There’s a real intellectual battle going on right now, and I think it would be a waste to just do more of the same, simply for the sake of doing more of the same.

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Filed under finance, government, macro, Way Forward

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