Noah Smith Boldly Goes Where Thousands of Austrian Critics Have Gone Before

Noah Smith Boldly Goes Where Thousands of Austrian Critics Have Gone Before
Profile photo of Robert P. Murphy

When a smart-aleck like economist Noah Smith pens an absurd critique–which mentions me by name–full of name-calling but bereft of actual arguments, it places me in an awkward position. On the one hand, if I answer Noah, it rewards him for his volley of insults. On the other hand, if I ignore him, it looks like he “pwned” us and we have nothing to say. After consultation with my Inner Circle of the Order of Sound Money, I have decided to clarify a few things in light of Noah’s Bloomberg piece.

First of all, as an avid Star Trek fan, I note that Noah’s pop culture references are as sloppy as his economics: His article likens Gary_Mitchell_AfterAustrian economics to the “brain worms” that tormented Chekov in the second movie (The Wrath of Khan), but at his personal blog Smith motivates his post with a picture of the antagonist from one of the first episodes of the original series. This is helmsman Gary Mitchell, whose mind isn’t captured by any foreign intelligence, but instead receives exponentially growing mental and telekinetic abilities after an accident at the edge of the galaxy. The moral dilemma of the episode is whether Kirk should pre-emptively kill his buddy before he becomes too powerful. So is Noah saying that Austrian economists are far superior to him intellectually, and must be killed before they overturn the economics establishment? No, that’s not what he’s saying; as with the text of his article, so too with his images at his blog: Noah is just spouting a bunch of insults that barely make sense, which is why it’s a fool’s errand to even try to analyze what Noah’s “point” is. Anyway, let’s move on.

Here is an excerpt that summarizes the meat (such as it is) of Noah’s article:

When the Austrian brain-worm invades, you start believing things like: 1) Federal Reserve money-printing is a government plot to boost big banks, 2) prices are rising much faster than anyone thinks, 3) real “inflation” means money-printing, not an increase in prices, 4) printing money can never boost the economy, 5) academic economics is a plot to use mathematical mumbo-jumbo to cover up government giveaways to big banks, etc., etc.

The Austrian catechisms range from almost plausible (taking toxic mortgage assets off of bank balance sheets must have been part of the reason the Fed did quantitative easing), to somewhere in the neighborhood of the 9/11 truthers and moon-landing hoaxers. Most of the elements of Austrianism are so directly contradicted by data that the belief system practically screens itself for people who are out of touch with reality.

I won’t hit all of these points, but let’s go through the first three:

==> “1) Federal Reserve money-printing is a government plot to boost big banks.” Does Noah deny that the Fed’s activities have helped big banks far more than the little guy? For example, did the Maiden Lane LLCs buy up underwater homes from struggling middle-class families? Did the Fed’s “extraordinary lending facilities” give loans to self-employed plumbers and dry cleaners to help them get through the crisis? No, all of the Fed’s activities directly shored up the balance sheets of huge banks.

Indeed, given what we know about human nature in general, and the history of government/business relations in particular, it would be an absurd “conspiracy theory” for someone to say that the Fed hadn’t been shoveling favors into the hands of the big bankers.

==> “2) prices are rising much faster than anyone thinks” This is a poorly worded point, since Noah is arguing that a large segment of the population has been seduced by the Austrian (alleged) myths. (If ten percent of the public thinks prices are rising like crazy, then it obviously can’t be true that “prices are rising much faster than anyone thinks.” But again, one mustn’t actually take Noah’s points seriously; his piece is more a work of art.) There are plenty of people who think the “cost of living” is a lot higher now than it was in 2007. No, I’m not saying we’re living amidst hyperinflation but the government is hiding it; but I do think the official Consumer Price Index is understating things.

==> “3) real “inflation” means money-printing, not an increase in prices” Noah really has fun with this one. Later on in the article, Noah makes it sound as if this is an ex post rhetorical move to save face. Here’s Noah:

The years 2011 and 2012 were to Austrians like sunrise is to a vampire. It was simply amazing to sit there and watch Austrians writhe and contort under the pure, burning light of extant reality. Massive torrents of Fed “money-printing” failed to budge prices; this fact directly cracked the central foundations of Austrian thought. The history-book moment came when David Henderson of the Naval Postgraduate School defeated Austrian champion Robert Murphy of the Ludwig von Mises Institute in a bet about inflation.

How did Austrians deal with this assault by the forces of extant reality? First they attempted to deny it. “Have you seen the price of X?” they would ask…

The Austrians’ next defense was to redefine reality. Inflation doesn’t mean a rise in prices, they said — it means an increase in the monetary base. QE wasn’t causing inflation, it was inflation itself. Duh! Now the Austrians were safe — after all, you can define inflation as anything you want. It’s a free country, ain’t it? You can define inflation to be a rare poisonous South American tree frog if you want, and the only consequence will be that people think you’re off your rocker. And so when Austrians tried to redefine the word “inflation” to mean something other than “a rise in prices,” people duly recognized that Austrians were off their rockers.

In the above, Noah is just making stuff up. First of all, he doesn’t provide any hyperlink to back up the claim that money-printing and rising (consumer) prices were tied to “the central foundations of Austrian thought.” He doesn’t provide a link, because no such link exists. Noah just made that up.

I personally have to be careful on this point, lest it sounds like I’m whining and making excuses for losing a bet. Yes, it’s true that I made a bet with David R. Henderson about the impact that the Fed’s policies would have. I lost the bet, and I paid David. I have indeed altered my views of the economy in light of this episode. In particular, I realize that worldwide investors have more confidence that the Fed’s “exit strategy” will work smoothly than I do. I won’t know whether they are idiots, or I was paranoid, until I see how exactly the Fed deals with its bloated balance sheet.

But Noah’s claim that my prediction about CPI movements has something to do with Austrian theory is nuts. Notice that the mainstream economists like to mock Austrians (Misesians in particular) on two different counts: In the first place, they mock us because we adhere to “praxeology,” which says that pure economic theory is deduced a priori, rather than through empirical observation. (Here’s Noah admitting he knows this, in point #2 of a February blog post.)

This isn’t a last-ditch effort for me to salvage the Austrian position in light of my ill-fated wager with David. For example, in 2003 I wrote up the logic behind Mises’ a priori approach to economics. Although it occurred after the bet, I trust people will concede that in my debate with David Friedman on economic method, I wasn’t advancing some new-fangled position; this is standard stuff that Ludwig von Mises developed in the first half of the 20th century.

So note the contradiction: On the one hand, mainstream economists ridicule Misesians for their “medieval” approach to economic theory, in which they deduce results logically rather than producing falsifiable propositions. But then these same critics tell the world that the outcome of a CPI movement destroys the foundations of Austrian theory. Huh?

(Believe it or not, this is why it never occurred to me, beforehand, to state, “Hey guys, just to be clear, the validity of Austrian theory doesn’t depend on the outcome of my CPI bet, just like if I wager on the Superbowl, that doesn’t prove Mises was wrong.” We Misesians had already suffered all sorts of ridicule for our stance that economic theory wasn’t dependent on empirical testing, so such a declaration should have been superfluous.)

Yet besides the silliness of claiming that Austrian theory’s foundations were cracked, Noah compounds the absurdity by arguing that the Austrians in response to the modest CPI hikes of 2009-2013 attempted to redefine inflation. No, Noah, this is not some new position. Here’s Mises on page 420 of Human Action:

The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by  no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

Now that was originally published in 1949, so I’m pretty sure Mises wasn’t providing cover for Peter Schiff and me in light of CPI after various rounds of QE.

If Noah doesn’t trust such a dodgy source as Mises, maybe he’ll heed the statements of an official Federal Reserve publication? Joe Fetz provided me with this 1997 Cleveland Fed paper, which says:

Today, we commonly hear about different kinds of inflation. Indeed, the word inflation is often used synonymously with “price increase.” But there is also a different, more specific, definition of inflation–a rise in the general price level caused by an imbalance between the quantity of money and trade needs. This “inflation” has but one origin–the central bank. It is the latter definition that drives many of those advocating an anti-inflationary policy for the Federal Reserve, and that more closely conforms with the word’s original meaning.

Oops, sorry Noah. Maybe next time you should do some research before writing on a topic.

Historically the word “inflation” did indeed mean what (some) Austrians currently insist is a better definition–namely an increase in money rather than an increase in prices–and beyond that, there are good theoretical reasons to prefer the original definition. We don’t need to take Austrians’ word for it, either: UCLA giants Alchian and Klein argued in a 1973 paper that asset prices should be included in a proper measurement of monetary policy. By that criterion, the Fed definitely has been “loose” and “inflationary” since 2008; indeed that was the whole point. People look at soaring stock prices and say, “Good job Bernanke!”

As anyone who has actually studied Austrian theory knows, it distinguishes itself–particularly when it comes to the business cycle–by rejecting aggregates. Indeed, that’s often how I would explain the difference between Chicago School and Austrian approaches: Although they both understood the dangers of “loose money,” historically the Friedmanites just looked at the problem of prices rising too quickly, without considering the impact that artificially low interest rates had on the capital structure. So it’s not just that Noah’s description is a little bit off; it’s totally backwards. The one school of thought whose core teachings are least vulnerable to movements of CPI is the Austrian School. And to repeat, this isn’t Monday morning quarterbacking: Austrians who follow Mises have been saying this for decades, and earned ridicule for it.

In closing, let me mention the worst slur Noah casually includes in his post:

Out in the wider world, the Austrian brain-worm’s darker whisperings are music to the ears of the paleo-libertarian Ron Paul movement. Austrianism’s antiSemitic overtones are conveniently papered over by the fact that two of its founding figures (von Mises and Murray Rothbard) were Jewish. But it’s no coincidence that Austrianism carries great appeal for the more unsavory corners of American politics.

First of all, you might be expecting that that link is to a video in which a self-identified Austrian economist says, “I don’t trust Jews.” But of course that’s not it at all. Instead, it’s a link to a YouTube animated video decrying the role of bankers, and of the house of Rothschild in particular. Is that “antiSemitic”? Only if you would you call it racist if I said I didn’t like basketball. (Note: I have no idea who the people are that created the video Noah linked to; his link is the first time I’d heard of it. If they marched in a Klan rally or something, then yes I will amend my remarks. But I think the burden is on Noah to substantiate his accusations, rather than for Austrians to prove a negative.)

But beyond analyzing that particular video, look at Noah’s wording again: “Austrianism’s antiSemitic overtones are conveniently papered over by the fact that two of its founding figures (von Mises and Murray Rothbard) were Jewish.” My question: What kind of a guy would write a sentence like that? Noah makes it sound as if a bunch of people got together and said, “Hey, we need to do something to stop these Jewish bankers. But shoot, nobody else understands their threat the way we do. I know! Let’s pick two Jewish economists and pretend they’re our heroes. Heh heh, the Zionists won’t see that coming. Man we’re good.”

No Noah, in contrast to your ridiculous description of what happened, even if we agreed that the Rothschild video is “anti-Semitic” and yet is tied to Austrian economics, a more straightforward explanation of the video would run like this:

In the video, a guy loses his house, and his American Dream is crushed. He is then taken back in time by a guy with a horribly fake African-American accent, to witness the source of his problems. As it turns out, everything is the fault of bankers, who steal people’s money through fractional reserve banking. Eventually, banking power is concentrated in the hands of a shadowy cabal headed by the Rothschilds, to whom even J.P. Morgan must kowtow. Thomas Jefferson and Andrew Jackson temporarily hold off the evil bankers here in America, ushering in a huge boom “with real money, backed with real gold.” But eventually the bankers get in, and end up forming the Fed, which proceeds to steal people’s hard-earned money even more via inflation and collaboration with the IRS. 
Anyway, for now I’ll ignore the oddity of anti-semitic video makers latching onto an economic philosophy (Austrianism) invented by a Jewish guy and a movement (the Ron Paul movement) inspired by another Jewish guy. Anti-semitism has always been a bit weird like that.

Yes, now that makes a lot more sense. Austrian economics and modern Austro-libertarianism are obviously not “anti-Semitic,” because their founders were Jewish. If indeed anybody could find anti-Semites attracted to the economics or political thought, that would be ironic on their part; it wouldn’t have anything to do with the bodies of thought themselves. As a treat, I’ll let the reader click the link to see who wrote the much more balanced explanation, which shows Austrian economics isn’t anti-Semitic.

In conclusion, Noah Smith has no idea what he’s talking about. He compounds his ignorance with casual accusations of bigotry that don’t even make sense. If thinking the Federal Reserve and government are in league with big bankers is a crazy conspiracy theory, then send me a tinfoil hat.

  • Sam

    I believe it was actually a bad later-in-his-career Al Pacino impersonation the guy in the animated movie was making, not a black guy voice

  • RickyVaughn

    Noah Smith is one more intellectual charlatan descended straight from Leo Strauss. The Straussian intellectual tradition (it's really more of a cult of personality) is straight out of the Pale of Settlement. Wise men like Strauss act as Rabbis proclaiming the word, and eager devotees spread the master's word gleefully. It borrows a lot from communal Ashkenazi Jewish shtetl culture.

    They argue not with humility and intellectual charity, but by casting aspersions and calling their opponents anti-Semitic. The worst thing to do is to take these accusations seriously. The best thing to do is laugh.

  • Raja Khan

    Increase in the quantity of money causes monetary inflation. This monetary inflation may not be accompanied by a corresponding price inflation (increases in general prices of goods). Just like anything else the price of money against other goods is dependent on the demand and supply of it. If the increase in demand of money is greater than the increase in the quantity of money, the general prices might actually end up falling.

    • @nderi_j

      May I say that growth of quantity of money doesn't cause monetary inflation. It is, indeed, monetary inflation. Otherwise you are right in what you asset in the post…

      • Raja Khan

        Agreed. :)

    • Frank Zeleniuk

      I agree that if an increase in the demand for money is greater than the increase in the quantity of money, the general price level may fall because, as I see it, the increased quantity will stay in savings, just as QE has money sitting on the balance sheets of banks. The money must be circulating in the economy to affect the general price level. As soon as the preference changes to a demand for goods and services that new money will increase the general price level.

  • Raja Khan

    The link to the Cleveland Fed's paper on the definition of 'inflation' was pleasant surprise. The link to who wrote the much more balanced explanation, showing Austrian economics isn't anti-Semitic was shocking, and something I didn't see coming. All in all a wonderful reply to a not so thoughtful diatribe.

    Although I have a sweet spot for the Khan in Star Trek for obvious reasons, in this case though I'll stand with Bob Murphy in condemnation of the unwarranted and unsubstantiated name calling by Noah Smith.

  • Frank Zeleniuk

    How can Noah scoff at the definition of inflation being an increase in the money supply? The effect of inflating the money supply is a rise in the general price level. Nothing affects the general price level more than an increase in the money supply. Variances in supply and demand may affect a commodities price and perhaps with a commodity like oil and society's dependency upon it in so many areas it could boost the general price level but I would think that demand for certain things would drop thus causing a drop in prices or simply the disappearance of some products and services if they cannot be sustained because of the high cost of energy. This would not happen if the monetary supply increased. Products and services would not be in danger of disappearing due to shifts in preference in society. It means those products and services would continue because there would be no shift in preferences.Their price would increase as well.

    QE was not inflationary, in my understanding, as it has not circulated in the economy. It has sat on the balance sheets of major banks. The government has even clawed back 100's of billions in fines from the banks making it appear that it has been able to lower the government's deficit.

    Do I have these concepts correct?

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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