Austrians on the current crisis

In watching the entire financial system melt down, it has been particularly jarring to see the kinds of contortions that the Austrian Economists at GMU have to go through to make this enormous, incredible market failure into the fault of the government. I need to put a much longer post up about this--taking into account the fact that, though the guys who write on the site linked above find themselves to be somehow particularly heterodox, they are really just the more reactionary, pure version of the common hegemonic narrative that is repeated over and over in the business press. Having the distinct pleasure of being able to see this faith-based protocol in its pure form on the blog--and in reading von Mises and Coase, as well as others in the Law and Economics movement for the diss--as the world is apparently falling down around us, due in large part to the hegemony of this kind of orthodoxy, has really led me to both understand the movement better and to see how bankrupt its purest theorists are. Though they have this veneer of being interested in change, in dynamic social systems, they have no interest at all in any such thing: they want a predictable system that adheres to the rules of capital through which all the creative and vital energies of humanity will be channeled only to be used as profits on the bottom line of the benevolent captains of industry who we will rely upon for all that we say, do, use, and produce. Entrepreneurs are certainly important; supporting them is a good idea. But there are plenty of other creative people motivated by a variety of other social and individual impulses: reducing everything that happens in society to the actions of a single mechanism--the mystical market--is an attractive and elegant metaphor, but it is far from adequate and its imposition in its western, corporate form is anything but the paradigm of freedom or liberty. It rarely does anything to challenge the ills it supposed would hinder it--strong authoritarian government, planned diversion of resources in a particular direction--it just chooses which members of the population should receive that bounty. Paeans to development and long run prosperity for all as well as micro-finance metaphors which make putting people on the hook for supposedly benevolent donations--all of these aside, there is much more complexity to human life that cannot be measured by markets--and much of it that has no business being left to the impulse of business alone.

As I said, this requires a longer post, but for the meantime, this is my initial reaction to this statement on the Austrian Economics blog:

As the financial world is melting around us (due to government policies)...

I would leave it as a comment, but there is no hope for an actual discussion there. The fact that they control the basic impulse of government seems beyond their comprehension since they opt for acting as if increasing the power of government in the interest of business isn't the long term result of their philosophy put in action. In a world where power still exists, where capital is able to purchase that power using its market power, it is difficult to see how people can deny the role of the state in making the market capitalization more possible: thus this intervention is basically business as usual, but hardly in the direction they claim it is. In their eyes, the market cannot be prone to crises: the only source of crisis is the state.

The single minded elegance of this led me to ask...

don't you think you might be a little reductive in blaming the government for every aspect of this? If the market is such an ingenious mechanism for sorting information, how did all these enormous market players fail to realize that they were being sold what were probably bad loans? They obviously knew there was something good to be gained on the gravy train of sub-prime. "There's no such thing as a free lunch," should work just as well for them: the players in this market had to know the other shoe was going to drop--people have been predicting it for several years. In fact, the GAO resisted getting involved in the market at all, even though they recognized the problem long ago. Yet the froth continued to rise, to spread far and wide--but it isn't the fault of traders who weren't interested in making it function efficiently--just to get as much as they could before the window shut.

I'm sure you can concoct a narrative which justifies your reductive paradigm, but even Marxists have a concept of "overdetermination." For you, markets are supposed to overcome all that nasty nuance: if it is such a robust mechanism, why is it so fragile when it comes to the singular enemy of the state ("kryptonite to the market.") It is able to adjust to every other kind of input, aggregate and predict every other kind of outcome, efficiently organize every other economic process, but the moment a form of direct political intervention (as opposed to environmental catastrophe, sudden shifts in supply or demand, etc.) it simply can't cope and goes completely haywire.

Or, more accurately, the Austrian assumption seems to be that it is all those beautiful things above in its essential nature: anytime it fails, it can only have one cause. It can never be the fault of the market itself: it must be "government policies." You're right, of course, lowering the wall between commercial and investment banks was a bad move: Glass-Steagall served us pretty well for more than half a century, regardless of the libertarian propaganda to the contrary. The policy of deregulation was, indeed, problematic.