Merging the “Austrian” and “Supply Side” Traditions in Classical Monetary Economics
June 2, 2013
(This item originally appeared in Forbes.com on June 2, 2013.)
I am a member of the “Supply Side tradition” in classical monetary economics. This is a lineage that goes back through people like Art Laffer and Robert Mundell. I would consider the late Jack Kemp and Steve Forbes to be more recent examples of this lineage.
The other main tradition in Classical monetary economics today is the Austrian tradition, which goes back through Friedrich Hayek, Murray Rothbard and Ludwig Von Mises, and has contemporary representatives like Lawrence White and Ron Paul.
I want to differentiate from the “supply siders” of the 1970s and 1980s. This was a political coalition focusing mostly on tax rate reduction. The idea of tax rate reduction is a good Classical notion. Economies work better that way. It is one half of the Magic Formula of Low Taxes and Stable Money. However, many of the “supply siders” of that era actually were followers of Milton Friedman and others when it came to monetary affairs. They rejected the Classical ideal of a stable, neutral currency, which is expressed in practical terms as a gold standard system.
Both the “Austrian” and “Supply Side” groups are branches of the Classical tradition in economics, which goes back to Adam Smith, David Hume, David Ricardo, John Stuart Mill and others. The “Supply side tradition” and the “Austrian tradition” in Classical monetary economics have a lot in common. We are all gold standard advocates.
However, the two groups have some differences in character. I look at the Austrian tradition as being somewhat like the Roman Catholic Church. It has been very good at reaching out to a broad swath of people, with websites like Mises.org. They are good communicators and write a lot of books. They are good at organization and bringing people together. Intellectually, they have tended to be somewhat simplistic and dogmatic, in my opinion, convinced of their rightness and superiority, although rather bad at expressing exactly why that is so. The thought leaders tend to be professors at small universities, particularly in the Southern states. In terms of sheer numbers, of active advocates and broader followers, they outnumber the Supply Side tradition by ten to one, if not more than that.
You could think of the tens of thousands of Roman Catholic priests in local churches, doing weddings and funerals, and preaching official Church doctrine among the lay people.
The Supply Side tradition is perhaps like the Franciscan monks, or the Jesuits. They are much smaller in number, and somewhat secretive. They tend to reach out to people in high positions of power, not the broad masses. In general, I think they understand theory better, but don’t communicate much. They don’t write many books, and their other writings can be somewhat oblique and opaque. They are not so doctrinaire, but instead are prone to arguing among themselves about some arcane point of theory. The thought leaders have tended to have careers on Wall Street of one form or another, which gives them an excellent place to study real economies in the real world, outside of the abstractions of academia. Although they are not particularly exclusive, because they make little effort to reach out to people, entry into this club has tended to be by way of personal association, and much knowledge has been handed down by something like an oral tradition.
You could think of a small group of Franciscan monks in an isolated monastery, arguing some point of theology or discussing a mystic vision long into the night — a discussion that would be unintelligible to outsiders.
Over time, the Austrian tradition tended to veer farther and farther from the mainstream, tending to insist instead on a total revolution in monetary affairs, which had no political chance of occurring except in a crisis situation that led to a revolution in politics as a whole. Their tendency toward idealism led them to be unwilling to accommodate the political realities of the day. Better to be ignored than to offer a plan that is compromised beyond recognition. They seemed to take a certain pride in being rather extremist — in past decades, their actual proposals have often been much more extremist than the real-life gold standard systems in use throughout the world in the pre-1913 period.
The Supply Side tradition, as it has reached out to people in positions of power, has tended to focus on things that seem politically achievable, even if that means deferring many of their ideals for the time being. Better a small step in the right direction than a proposal for total monetary revolution that everyone ignores as the babbling of kooks. The Supply Side tradition has tended to be rather shy, not wanting to talk about what they really think in public, lest they get grouped along with the extremist hard-money cranks. During the 1980s and 1990s, the “anti-inflation strong dollar” stance of Fed chairmen Paul Volcker and Alan Greenspan was actually in line with Classical stable money principles, at least in the broadest sense, and it seemed like more progress could be made in this direction in incremental steps.
The contrast between the Austrians and Supply Siders was particularly strong in the 1980s and 1900s, when the Austrians were at their most cranky and extreme (led by Murray Rothbard), and the Supply Siders, coming off their big achievements in tax policy during the Reagan Revolution, didn’t want to alienate their new political friends. They would make a few casual mentions in op-eds or other writing, barely a few words, and hope that maybe it would have some positive effect.
The Supply Siders were so anxious to compromise, and make political baby steps, that apparently many people didn’t even know that they were always in favor of a full-scale pre-1913-style world gold standard system. As a member of the Supply-Side group for about fifteen years now, including years of close personal contact with some of the leaders of the 1980s and 1990s, I can attest that this was always the ultimate goal. My Austrian pals are apparently surprised by this.
Today, the two sides have come together a lot, I think. The Austrian group has grown beyond the dogmatism of past decades, and has become willing — in my estimation — to embrace something much more like the actual gold standard systems that were in use in the pre-1913 period. There were actually a lot of different systems in use in those days, and they all worked. Today’s Austrians seem willing to be a lot more flexible, as long as they can get a system that works and is in line with their broader goals and ideals. They are also, I would say, rather more sophisticated on a theoretical basis than in the past, and better understand basic principles rather than just repeating something they heard somewhere.
I tell my Supply Side pals that the Austrians’ recent writings are actually quite sensible and workable. They seem surprised by this.
The Supply-Side tradition has become more communicative (myself for example), as their oral tradition was spread to a broader audience via the Internet. They are still bad at actually writing books, however, which is why I say we still need a “shelf of books” that is correct and up-to-date. With the arrival of arch-Keynesians like Ben Bernanke and others at the Federal Reserve, and Democratic administrations in power, the Supply Siders don’t have much ability, or even interest, in trying to influence public policy in an incremental way. Those guys are too far gone down the path of “easy money” currency-jiggering.
Today, we are drifting more toward monetary revolution, as the Keynesians eventually accomplish the collapse of the existing order. When the present systems ultimately burn to the ground, the Supply Siders and Austrians should be there together to build something new amidst the rubble.
Maybe even those terms will become outdated, as the two groups essentially merge. A similar thing has already happened with Team Funny Money, as nobody can quite tell apart the Monetarists and Keynesians anymore. Ben Bernanke is a mix of both.
That’s why I now stand arm-in-arm with Ron Paul regarding his idea of introducing parallel, gold-based alternative currencies in the United States or elsewhere in the world — perhaps leading even to an end to the Federal Reserve as we know it.
I think the Austrians and Supply Siders can now come together under the idea of the “pre-1913 world gold standard.” This is an idea with a lot of flexibility, and room for personal interpretation. The Federal Reserve didn’t exist before 1913, but, on the other hand, the Bank of England had had a monopoly on British money for over two hundred years. Despite this rather large difference in particulars, both the United States and Britain embraced the Classical ideal of stable money, and, in practice, a gold standard system.
In the future, perhaps the United States will return to the kind of distributed “free banking” system that existed before 1913 (some would say before 1863), while China could adopt a more British-style approach and have a unified state-sanctioned monopoly currency much like the Bank of England’s British pound.
As the intellectuals and thought leaders build a new consensus, the politicians will gradually understand that they have the theoretical foundation to start to put these ideas into policy practice. We aren’t there yet. We still need that “shelf of books,” which is sophisticated, contemporary, and free of egregious error, and reflects that new Classical consensus even as it expresses individual preferences. Nevertheless, the road ahead is clearer than it has ever been.