I AM a rare thing in UK academia – an Austrian school economist. Few understand what that really means. If you know the term, you may wonder why my columns aren’t shorter, since many caricature the Austrian economic position as an unbending “do nothing”. But this is misleading.
For example, Austrian school economists tend to favour a health system regime determined by the market forces of demand and supply, as opposed to the judgments of central planners. But imagine there was a flu epidemic – how should the NHS respond?
A caricature of the Austrian position would be to “do nothing”, let people die in horrible circumstances (perhaps exploiting those deaths as evidence of the problems with the current system), while holding a vague hope that markets will develop to mitigate the problems of a nationalised provider.
However, in reality Austrian economics can provide insights on the planners’ policy choices. Under an ideal regime these wouldn’t be decisions that central planners would have to make, but in the real world they do. While central planners lack the knowledge required to respond perfectly, economics still provides some help. All else equal the increase in demand for vaccines would bid up prices, this would signal that there is a shortage, and there would be an increase in the quantity supplied. It is not beyond the realms of fantasy that central planners may respond to the epidemic in a way that leads to better economic coordination than literally by doing nothing.
The difficulty of knowing how much to expand production by, who to give it to, and an infinite list of other considerations demonstrate why a centralised health system is still destined to fall short, but the issue is how quickly, and how painfully it does so.
When Austrian economists are accused of advocating “doing nothing” people are confusing our ideal regimes with our suggestions on policy. With a free market regime in banking, central planners would not need to do anything, in just the same way that in a free market in healthcare the health secretary would be redundant. But as the banking regime is currently centrally planned, “do nothing” is not even a policy option.
In monetary policy terms, “do nothing” would literally mean “don’t touch the printing press”, which would in fact lead to a fall in the money supply as existing notes got worn out. Some use “do nothing” to mean “keep the money supply constant” but even this is more complicated than it sounds. Milton Friedman’s criticism of the Federal Reserve during the Great Depression was not that it allowed the monetary base (the part that the central bank directly controls) to fall, but that it failed to increase it by enough to offset bigger falls in the broader money supply.
So I too am suspicious of those who advocate “doing nothing”. Unless they make it clear that they are attempting to shift the issue from practical policy to ideal regimes they are being dishonest. And if they refuse to suggest an alternative policy, they cannot criticise existing ones (how can something be a mistake if there are no better options?) For as long as you have a central bank, it is doing something. It may serve as an easy excuse to avoid debate, but – sadly – “doing nothing” is not an option. Austrian economists have a place in the policy debate, even in an imperfect world.
Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School.