The schizophrenic Tyler Cowen
Though I am not exactly a member of the “Austrian school of economics,” I would consider myself somewhat of a fellow traveler and a confidant advocate of the “Austrian” Business Cycle Theory - save a few eclectic, though minor, variations.
That being said, however, I have not really been so much of an “Austrian” that I would dismiss some of the critiques of the theory outright - that was until one proponent of the rational expectations side of the critique let his hand down in contradiction.
On his blog, Tyler Cowen recently wrote,
Forget about particular details for a moment, in conceptual terms what led so many financial institutions to take so much excess risk? Bob Frank addresses that question and here is my list of major factors:
1. Collective stupidity: A lot of Greeks believed in Zeus and a lot of people in 1938 thought Hitler would be good for Germany. They were just plain, flat out wrong. I’ll also put “model error” under this heading. The relevant stupidity concerned both the fate of home prices and the degree of acceptable leverage.
Now, the question of whether or not businessmen would be “dumb enough” to let their reason slide in a collective fervor is an intriguing point and not one that should necessarily be completely disregarded without some thought. That being said, however, it is interesting that Cowen would come up with this specific point to reveal the origins of the current financial crisis in the US markets - especially considering that his main point of contention with the “Austrian” Business Cycle Theory remains that businessmen are not dumb enough to be confused by some of the suspicious and esoteric actions the central bank partakes in.
Holding up his own brand of rational expectations, claiming that his opponents are merely “postulating a very thin skull for markets and then blaming government for the disaster which results from government’s glancing blow to that skull,” Cowen’s critique of the Austrians seems strikingly similar to what he assumes of markets today - that, to be frank, people in the market can just be stupid sometimes.
What gives? I can understand being incapable of answering some of the questions about why the central bank’s secrets and methods are so easy to discern and preempt in the market - for the fact remains that they are not - but blatant inconsistencies like this seem too much to justify.