Showing posts with label Peter Boettke. Show all posts
Showing posts with label Peter Boettke. Show all posts

Saturday, October 15, 2011

Public Choice Foundations of Macroeconomics?

In discussing Tyler Cowen's suggestion for a better foundation for macroeconomic analysis than the Keynesian IS-LM model, Peter Boettke at Coordination Problem affirms Cowen's appeal to public choice economics. As Boettke argues:
If the crisis has taught us anything, I would argue that it has taught us about the necessity to treat politics as endogenous to the model of policy choice.  Buchanan and Wagner's Democracy in Deficit still represents the best starting point for understanding what went wrong with the Keynesian model of technocratic economic management.  And Wagner's work on political manipulation and the boom-bust cycle is the most underrated of the public choice contributions to macroeconomics.
It is certainly helpful for us to be aware of political realities when assessing the likelihood of successful policy implementation. However, I am not convinced that we want to make economic realpolitik the foundation of macroeconomic analysis. It seems to me that economists should be able to explain the consequences of monetary inflation via credit expansion regardless of political realities.

As such, I suggest that instead of beginning with public choice, we begin with an economic framework that is even more underrated by today's profession: the Austrian, Causal-Realist tradition. The economic framework built by Menger, Böhm-Bawerk, Mises, and Hayek, brings together many different strands of economic theory to adequately analyze and explain macroeconomic fluctuations.

Sound macroeconomics must first incorporate what integrates the entire social economy. It must take into account money. Because as the medium of exchange money is traded in all markets, monetary changes affect everyone. It must also take into account the capital structure, because the entire stock of consumer goods is supported and made possible by a vast, complex and multi-stage production structure. 

It is the causal-realist economists who have most successfully put together monetary economics and capital theory to arrive at a business cycle theory that explains how we got here from there and also how to get out of our current mess. Recent culminations of this tradition in macroeconomics include Roger Garrision's Time and Money and Jesus Huerta de Soto's Money, Bank Credit, and Economic Cycles. Their work definitively demonstrates that state manipulation of the monetary system have vast consequences. Inflating the money supply via credit expansion artificially lowers interest rates, encouraging entrepreneurs to malinvest, directing factors of production to stages of production farther from producing consumer goods than is warranted by the desires of people in society. That malinvestment must eventually be liquidated via recession. 

The above is true regardless of political realities. The first task of any economist is to get the analysis straight. Once we have done that, we can turn some of our attention to advocating policies that will accomplish more sound economic conditions. Public choice economics may be able to shed light on why certain policies are harder or easier to implement than others and might help us understand how certain consequences are not those planned by policy advocates. It can't however, serve as an actual foundation for macroeconomic analysis.