The Chief Economist of Deutsche Bank Group, Thomas Mayer, has announced that he is “an Austrian in economics”. In a new paper released today by Deutsche Bank Research, based on a speech he gave this week, Mayer says that the Austrian theory of the business cycle describes what we are living through pretty well:
– Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events. . . .
— …First and foremost, firms should have the incentives to follow sound business practices. The best incentive is to make failure possible. Hence, we need resolution regimes for financial firms.
— In a world where people have imperfect foresight and do not always behave rationally, and markets are not always efficient, we need to accept that economic policy cannot fine-tune the cycle.
— For us economists, the lesson from recent events should be to rely less on the development of theories by ―deduction (like in natural sciences) and to apply more induction(like in social and historical sciences). Failure to study history makes us repeat the mistakes of the past.
Mayer goes on to outline and argue for the mainstream Hayekian narrative of the last decade. Low interest rates inflated a bubble and knocked the whole economy out of kilter. Where non-Austrians misconstrue Hayek is in thinking that he is only focused on the bubble itself – they rightly point out that the housing sector itself wasn’t big enough to create our current stagnation. But Hayek’s genius was in recognising that the entire economy is interconnected, and credit distortions in one sector can disjoint the rest. If you imagine a tower of blocks, taking one block away (or changing its shape) can knock all the others down if it’s in the wrong place, even if it’s relatively small. Similarly, credit distortions affect the whole economy because everything is so interlinked.
Anyway, read the whole Mayer piece. We can add him to the Hayek Club.