The Right and Austrian Business Cycle Theory

It used to be that left-of-center politicians were mostly drawn toward neo-Keynesian ideas about economic policy whereas right-of-center politicians were more likely to follow Milton Friedman’s monetarist school. But in the depths of the current recession, while Keynesian and monetarist approaches still tell you somewhat different things, both approaches counsel fairly substantial policy interventions. As of November and December of 2008, that was leading some to predict that we might have a fair amount of bipartisan consensus over economic recovery efforts.

Hasn’t happened. And not only have conservatives been sharply critical of Barack Obama’s American Recovery and Reinvestment Act, but conservatives have been increasingly critical of Ben Bernanke who, as best one can tell, is a rock-ribbed right-winger appointed to office by George W. Bush.

Hand-in-hand with this trend is, as Dave Weigel reports, Ron Paul’s success in evangelizing among congressional Republicans for the economic thought of Thomas Woods, a figure who conservative congressmen weren’t prone to listen to when he was arguing against Bush’s wartime policies. Now, however, Woods is pushing a fringe economic doctrine that tells the right what it wants to hear so he’s gaining popularity. The doctrine in question is so-called “Austrian” business cycle theory, memorably lampooned by Tyler Cowen. You can see other brief criticism from a libertarian point of view from Bryan Caplan or read Paul Krugman’s 1998 takedown.

But perhaps the pest thing to read is this recent item from John Quiggin which lays out the ways in which Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded.