I’m no fan of Austrian macroeconomics, but even I think Noah Smith is way too hard on Austrian economics in this post. Although he does distinguish between Internet Austrianism and academic Austrianism, he doesn’t really do so very clearly in the portions of the post that mocks the Austrian school of thought–leaving the impression that his ridicule applies to both varieties. (Maybe it does.) Then suddenly, Smith is way too kind to Austrianism and too mean to ratex:
But at least Austrianism embraces the possibility that businesses might make big, systematic mistakes. That possibility is essentially ruled out by most modern mainstream models, which use “rational expectations” as their jumping-off point. It also requires that productive capital come in multiple forms, while mainstream macro usually assumes that all forms of capital are interchangeable. Over in China, it seems clear that there has been a lot wasted resources –ghost cities and overcapacity in various manufacturing industries. That in turn seems to have led to a bubble in Chinese real estate prices, whose slow decline may in turn have caused the recent spectacular stock bubble and crash.
There are lots of problems here:
1. Why would overbuilding of homes “have led to a bubble in Chinese real estate prices”? Wouldn’t it depress prices?
2. What does it mean to suggest that rational expectations doesn’t allow for systemic mistakes? I always thought that meant it ruled out repeated mistakes in the same direction, predictable mistakes. Here he seems to apply it to economy wide mistakes. In fact, ratex does not rule out 99% of the population holding expectations at a point in time that, ex ante, are too optimistic. I’m sure that 99.99% of New Yorkers did not expect the Twin Towers to collapse on 9/11, and yet ex post their expectations that the Twin Towers would not collapse were too optimistic. Was that a systematic mistake? I don’t think so.
3. The ghost city phenomenon is a creation of the Chinese Communist government. There is nothing in ratex theory that I know of that rules out the possibility of communist governments doing a poor job of allocating resources.
HT: Gordon