Austrians on Public Works and Fiscal Stimulus

I have recently seen this post by Mario Rizzo here:

Mario Rizzo, “The Infrastructure Death Rattle,” November 6, 2011.

Rizzo makes a curious comment in his opposition to Obama’s mild stimulus plan:

“The case for infrastructure spending must be made on the value of what is to be built or repaired and the efficiency with which that is done, not on the number of jobs that may be created. Frederic Bastiat made this point in the middle of the nineteenth century.”

This suggests that Rizzo is not completely opposed to the idea of public works spending, despite his criticisms.

It strikes me that two rather well known Austrian economists can be regarded as having endorsed or at least acknowledged the usefulness of fiscal stimulus and public works in a depression: Hayek and Ludwig Lachmann. Here one should always be aware of the diversity in opinion that does characterise the Austrian school, with its different strands.

Lachmann most notably had this to say about Keynesian stimulus during depression:

“Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome.” (Lachmann 1973: 50).

Lachmann’s point here is also that Keynesian polices to contract demand, the other side of fiscal stimulus, worked in the Second World War.

Hayek’s limited support for public works in severe downturns can be seen here:

“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).

“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor.” (Hayek 1999 [1937]: 184).

I have also pointed out before that a number of the early first and second generation Austrians were Progressive liberals and sympathetic to Fabian socialism, such as Eugen von Philippovich von Philippsberg and Friedrich von Wieser.

It is a great pity that the modern Austrian school under the spell of Mises, Rothbard and Hoppe fails to think more carefully about its own historical diversity.

BIBLIOGRAPHY

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.

Hayek, F. A. von. 1999. “The Gold Problem” (trans. G. Heinz), in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 5. Good Money, Part 1. The New World, Routledge, London. 169–185.

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs.