Austrian economists taking over the GOP?
As David Frum has noted, Austrian economists are awfully popular among Republicans. It’s an odd phenomenon: many of the world’s most influential economists are conservatives, but none of them are Austrians. And instead of embracing the most brilliant economists in the world, Republicans lift talking points from a group at the margins of modern economics.
At a superficial level, Austrians are influential because they’re so damn loud. Ever listened to conservative talk radio or watched Beck’s TV program? Chances are you’ve listened to an Austrian economist, probably one predicting impending economic apocalypse. As an occasional contributor to FrumForum, I learned quickly that Austrian economics posts invite an army of e-critics. (This piece will likely inspire an essay-length comment and about 84 links to articles on mises.org.) But there’s something else going on. Austrians aren’t just the most vocal and inspired advocates of capitalism; these days they often seem like capitalism’s only friends.
But what is Austrian Economics? Thom Lambert recently discussed it:
A hallmark of Austrian thinking, especially as articulated by F.A. Hayek, is the notion that the information required to allocate productive resources to their highest and best ends, and thereby to maximize wealth, is not readily available to any individual or central authority. Instead, it is widely dispersed among individuals throughout society. Accordingly, attempts to maximize value by allocating productive resources in a centralized fashion — i.e., according to the dictates of central planners — are destined to fail. Those planners lack access to important information (most notably, information about how individual consumers value competing uses of productive resources) and could not effectively process all that information, much of which is conflicting, even if it were accessible.
But, say the Austrians, there’s no need to despair. In a society with well-defined, freely transferable property rights, the impossibility of effective central planning presents little problem. As individuals engage in trades in an attempt to better themselves, prices for productive resources will emerge. Those prices incorporate all available information about the relative value of competing uses of a productive resource (i.e., the person willing to pay the highest price for something will create the most value from it and should possess it if the goal is to maximize wealth). They present that information in a simple, useful form (i.e., one need not worry about calculating the net effect of conflicting bits of information about a resource’s highest and best use; the price mechanism will do so). And they motivate economic actors to take precisely the steps that will maximize total wealth (i.e., relatively high prices for a resource induce producers to make more of it and consumers to substitute away from it; relatively low prices induce less production and more consumption of the resource). Thus, when property rights are well-defined and freely transferable, prices will create a spontaneous order that trumps anything achievable using central planning. ...
I should note one other Austrian (specifically, Hayekian) distinction, this one between types of legal rules. Some legal rules are general in their application, are “purpose-independent” (meaning that the law-giver isn’t trying to achieve some specific social outcome but is instead trying to resolve a dispute in accordance with the parties’ settled expectations), and have the effect of setting clear expectations so that parties may confidently predict outcomes in structuring their affairs. Hayek refers to these sorts of rules as nomos. Other legal rules are more akin to specific orders from a central authority seeking to achieve some specific purpose. Such “teleological” rules Hayek refers to as thesis.In light of their emphasis on the knowledge problem and the impossibility of effective central planning, the Austrians (most notably Hayek) contended that legitimate law is nomos. Thesis is something other than genuine law. The common law, for the most part, is nomos. Most (but not all) legislation is thesis. The characterization of any piece of legislation will depend on whether it amounts to specific orders aimed at achieving a set purpose (e.g., the new federal health care law), in which case it is thesis, or is instead simply seeking to codify purpose-independent rules that settle parties’ expectations and enable them to order their affairs in light of the information to which they alone are privy (e.g., the Uniform Commercial Code), in which case it is nomos.
Thom identifies insider trading as an example of a law that Austrians would regard as thesis:
If they were free to structure their relationship as best they saw fit, corporate investors and managers might well choose to allow managers to trade in the stock of their company on the basis of inside information. As Henry Manne first observed, such trading could constitute an efficient compensation mechanism for managers and would also tend to make the corporation’s stock price, influenced by highly informative insider trades, more reflective of the corporation’s true business prospects (i.e., more efficient). As corporations experimented with different insider trading policies, capital markets would tend to punish those that were value-destructive and reward those that were value-enhancing. Federal securities law, however, prohibits investors and managers from crafting optimal insider trading policies. Instead, the law forces a single policy on all corporations: managers generally may not trade on the basis of material, non-public information, even if investors would prefer that they be allowed to do so. Such top-down, central planning of investor/manager relations is inconsistent with Austrian thought. (And note that the insider trading ban conflicts with Austrian thought even if one construes the ban as a means of protecting the corporation’s property rights in information. While the Austrians would certainly support policies that clarify who owns corporate information, they would oppose policies mandating that the ownership right be non-transferable from corporation to managers.)
I'm not an Austrian, of course. For example, I believe that an insider trading prohibition ought to be mandatory rather than a default.
As for why I am not an Austrian, I refer you to Bryan Caplan's brilliant essay Why I Am Not an Austrian Economist
