Continuing My Chats With Noah Smith

Continuing My Chats With Noah Smith
Profile photo of Robert P. Murphy

Economist Noah Smith has fired another volley against Austrian economics, in response to my Mises Canada defense against his Noah Smith Doppelgangeroriginal attack featured on Bloomberg. Much to my surprise, several of my followers asked that I answer Noah yet again. I thus write the present blog post in service to them, and also because I admit that Noah is funnier than “standup economist” Yoram Bauman. (Note: Before you angrily ask me, “Murphy, you’re saying Noah is funny?” I want you to go back and re-read my words: I said Noah was funnier than Yoram Bauman.) Also, as one last clarification, the nearby photo is not of Noah Smith. On the contrary, that guy would at least admit that he’s a partisan shill.

Now in all seriousness, Noah is actually a really sharp guy. The problem is that he’s JUST SO SURE the Austrian contribution to recent debates is so absurd, that he doesn’t even try to understand where we’re coming from. He’s like the patronizing police psychologist Silberman interviewing Kyle Reese in the first Terminator movie: “This is great stuff. I could make a career out of this guy! You see how clever his part is? How it doesn’t require a shred of proof? Most paranoid delusions are intricate, but this is brilliant!” Needless to say, with an attitude like that, Noah is just as oblivious to the dangers facing us, even though he (just like Dr. Silberman) no doubt thinks he’s being very scientific in his handling of my unorthodox claims.

Let me give you just two examples to show why this “debate” is just a big joke to Noah (which, to repeat, made me so surprised to see some of my own fans thinking he had done a decent job with his latest volley).

First, here is how Noah deals with my claim that two of his accusations were contradictory: My article was not intended to point out that Austrian theory failed its own test of validity following QE. It can’t possibly fail its own test – it designed the test so that it could not fail it. My point was that Austrian theory has failed other people’s test of validity.”

Well hang on a second, Noah. Here’s what you actually wrote in your original Bloomberg piece: “Massive torrents of Fed “money-printing” failed to budge prices; this fact directly cracked the central foundations of Austrian thought.”

So not only does Noah get to come up with his own test of the validity of Austrian theory–he gets to define the “central foundations of Austrian thought”? By symmetry, do I get to define the “central foundations of Keynesian thought,” without even giving a quote or a link to back up my assertion?

Now on to a second example showing how little effort Noah is putting into actually understanding the Austrian position. The big Black Eye some of us Austrians have, is that we made predictions about consumer prices that turned out to be wrong. As blog readers know all too well, guys like Krugman (and Noah) have had a field day with this outcome, thinking it proves that Fed policy hasn’t been reckless after all.

Now amongst other replies, I pointed out in my article that although official consumer prices didn’t go through the roof, asset prices have indeed exploded across the board; even Neil Irwin recently wrote an article wondering if we were seeing bubbles in “everything.” Moreover, I discussed a paper by Alchian and Klein from 1973 that demonstrated on theoretical grounds that asset prices were a better gauge of monetary policy than spot consumer prices.

So how did Noah handle this aspect of my response? Like this: “[I]f asset price rises really are the same as consumer price rises, who cares if consumer prices rose more than the official statistics suggest?”

That’s really astonishing if you stare at it a few moments. In case it’s not hitting you, let me change the context. Suppose we were arguing about US foreign policy, and Noah had said, “The invasion of Iraq wasn’t as bad as the critics warned, because only about 4,500 US military died. That’s bad, of course, but nowhere near the numbers some of the harshest critics predicted.” Then I say, “Well, I bet the US government is downplaying the ‘official’ numbers of American fatalities, and anyway the downside of the invasion isn’t just US military deaths. Hundreds of thousands of Iraqi civilians died because of Bush’s reckless decision to invade.” Then Noah replies, “These two objections cancel each other out and prove Murphy knows how weak they are. If Murphy is arguing that US soldiers are really the same thing as Iraqi civilians, who cares if more troops died than the official statistics suggest?”

I submit that in a foreign policy debate, if someone made the analog of Noah’s argument, we could all agree to do something better with our time than continuing to read his blog. But fans of economists are a strange bunch, so we’ll continue.

The one main idea of Noah’s critique is that (he alleges) Austrian economics was wedded to the prediction of large consumer price inflation, and since that hasn’t happened, it means honest Austrians must admit their theories are either wrong or vacuous. Yet as I and others have repeatedly tried to explain to Noah, there was nothing about “Austrian economics” per se that predicted large consumer price hikes. Indeed, as Noah himself admits in other contexts, Austrian economics per se doesn’t make empirical predictions–that’s either its virtue or its vice, depending on your methodological views.

This really isn’t a desperate ex post attempt to deal with a failed prediction. Plenty of prominent fans of the Austrian School were arguing with me (and others) in the early days of QE, for example, saying I (and Peter Schiff et al.) were wrong about our warnings of imminent consumer price inflation.

Don’t believe me? Here is the opening paragraph of my article at from DECEMBER 2009:

One of the more awkward situations facing Austrian economists today is that we are divided on whether to expect price deflation or inflation. Although it’s good that we publicly disagree with each other — rather than bury our disagreementsto reassure the lay public that we know what we’re talking about — it’s nonetheless unsettling that our prognoses for the US dollar are so divergent.

So can someone please explain to me, how it’s possible that predictions of CPI inflation are a “central foundation” of Austrian economics, if back in December 2009 I was lamenting that the Austrian community was so divided on whether the threat was inflation versus deflation? Go read Vijay Boyapati’s paper (published in 2010, meaning he had these views earlier), which used an Austrian framework to conclude:

[T]he Federal Reserve’s most likely course of action is to keep the mortgage
market, in which most of the losses are concentrated, in a sort of stasis,
where losses are acknowledged slowly over time. Such a policy, which might
well be called “controlled deflation,” would lead to a prolonged period of
high unemployment and slow growth, as capital was only slowly reallocated
to satisfy consumer preferences. Further, the insufficient or barely sufficient
creation of new credit to make up for debt paid down, or defaulted on, would
cause a low growth in aggregate prices, which might occasionally become
negative. Not until the losses of the housing boom are fully cleared—which
might takes years under a policy of controlled deflation—should we expect
an inflationary credit expansion and a significant rise in prices.

To reiterate, there’s nothing “Austrian” about the predictions of rising consumer prices. Guys like me thought investors would panic and short the dollar–and that commercial banks would try to turn their excess dollar reserves into a different asset–and so far I was wrong. The idea that “other things equal, huge expansions in the monetary base will lead to a weaker monetary unit” is hardly unique to von Mises.

Furthermore, I didn’t make an inflation bet with Paul Krugman or Brad DeLong. No, I made it with David R. Henderson–who advocates “austerity.” So why aren’t Noah, DeLong, etc. telling their readers to read more about the work of Henderson, since his “model” just proved how great it was? Further, regarding my still-pending inflation bet with Bryan Caplan (which inspired my now-infamous bet with Henderson): No matter what happens, an anarcho-capitalist will ultimately win the wager Bryan and I made (since we’re both anarcho-capitalists). So will Noah say, after one of us is declared the winner, “Wow, I used to think we needed a State to provide military defense, but now I have to update my Bayesian priors in light of this new evidence of a worldview’s predictive power”?

Of course not. So when Noah, DeLong, Krugman et al. try to claim that they’re empiricists who grade economists based on their predictions, don’t believe a word of it. I don’t remember any of them demanding that Bernanke be removed from the Fed, even though it would be hard to have a worse track record when it came to predicting the moves of the economy. (Indeed, upon Bernanke’s reappointment Krugman said there was no one he’d prefer to be Fed chief. Yeah yeah, Krugman didn’t actually mean what he wrote–but neither does Noah. That’s kind of my point. Their blog posts are to be taken as seriously as a commercial claiming, “Our prices are INSANE!”)

In closing, let me quote once again from Noah’s latest, because it so perfectly epitomizes the difference between Noah’s brand of wise-aleck analysis versus the sober wisdom of Ludwig von Mises:

[NOAH SMITH:] Imagine yourself saying this: “Oh, no, the price of stocks is going up! Jeez, how will I be able to afford my weekly purchase of 100 shares of my favorite ETF? I better ask my boss for a raise!” You can’t, right? Because when stocks go up, that’s good.

Now an Austrian may be tempted to retort: “But this price rise is only temporary; it’s going to crash later!”

OK, even if that were the case, it would be the crash, not the rise in stock prices, that would be the bad thing. Whereas if you’re worried about increases in the price of say, TVs, your chief worry is not that the price of TVs will subsequently crash – in fact, you probably hope that it does, so you can get a cheap TV.

Everyone got that? If Austrians are warning about huge asset bubbles, they’re still a bunch of clowns, because it’s the subsequent crash that’s bad–not the preceding boom. (Picture Noah on the deck of the Titanic. A passenger points dead ahead and screams, “We’re heading straight for that iceberg!” Noah smirks and asks, “What’s your point?”)

In contrast to Noah’s nonchalance about booming asset prices, here’s Ludwig von Mises from Human Action:

[LUDWIG VON MISES:] The popularity of inflation and credit expansion…manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath…is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.

  • Albi

    Stop changing the terms of the debate. Inflation can not be whatever you want it to be. And by the most acceptable definition, inflation has been really low post-crisis. Strike-out guys, better revise your views on how the world works.

    • Luton_Ian

      "Inflation" is increase in the money supply, which has been several hundred percent since the crisis.

      The price increases have been happening in the stock and commodity markets, while consumer prices which would likely otherwise have been falling have risen slowly.

      When a further "shock" occurs, it will likely result on more of that new money leaking into the wider economy, and chasing an unchanged supply of goods and services.

      • pithom

        Source base has increased several hundred percent; money supply hasn't increased by nearly as much. Inflation is caused by M2 growth, not by M1 growth (which is heavily correlated with real GDP). I don't see much inflation coming, but I agree that the asset price inflation of the past half decade has been utterly unsustainable.

    • Bharat

      Wait, did you actually read the article or did you decide just to skip the text and head to the bottom for the comment button?

  • bill40

    Cheer up Robert there's nothing to know about economics. Everyone has been wrong so far and will probably continue to be. there is nor such thing as equilibrium, there are no rational actors, money supply cannot be controlled and coercion will always be used by either the state or private interests. The object of economics is to hold a mirror up to humanity but there isn't a mirror big enough so it's all rather futile really. I really like all the funky charts and graphs though.
    The ultimate problem of the Austrians are twofold. The currency system you advocate (Gold Standard) doesn't exist and you don't appear to know what a free market actually is. The very term "free" is a misnomer when applied to markets. Your solutions are wrong, so are Noahs' and in all probability mine (MMT) are as well. In the long run we're all dead.

    • Luton_Ian

      when all else fails you, descend into nihilism and contradiction.

  • wmeworry

    But imagine all these respectable economists trying to make a name for themselves by belittling Austrian economics. Wow! What a long we've come.

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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