Rand Paul's Austrian Economics: A Political Philosophy

Rand Paul is a self-proclaimed follower of Austrian economics, a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian economics is a scholarly tradition that consists of a body of theory that explains how an economy works, with economists developing theory a priori, meaning explanations are derived logically from sound starting points.

Paul has been criticised for his association with Austrian economics, with some saying he is embarrassing the school of thought. Paul's comments about naming Austrian-hater Milton Friedman as an ideal candidate to head the Fed have been met with backlash, with critics saying that Friedman was contemptuous of the Austrians.

Rand Paul's views on Austrian economics are criticised by Paul Krugman

Rand Paul's views on Austrian economics have been criticised by Paul Krugman, who has described Paul as a “political opportunist” who will “say and do anything” to get elected. Krugman, a Keynesian economist, has mocked Paul's suggestion that Austrian-economics critic Milton Friedman would have supported his monetary views. Krugman also criticised Paul's interpretation of Austrian business-cycle theory, arguing that it encouraged a “do-nothing policy” during the Great Depression.

Krugman's views on Austrian economics are also critical of its key proponents. He described Ludwig von Mises, the originator of the Austrian theory of the business cycle, as having “dropped Austrian business-cycle theory” during the Great Depression. Krugman also claimed that Friedrich Hayek, another prominent Austrian economist, was merely a Keynesian.

However, some commentators have defended Austrian economics against Krugman's criticisms. UCLA economist Lee Ohanian argued that Krugman failed to grasp the multi-causal explanation of the Great Depression, instead adhering to the “simplistic notion of aggregate demand failure” as the sole cause. Ohanian concluded that government policies, including those that increased labour's ability to raise wages above competitive levels, were a significant factor in the Great Depression—an argument in line with Mises's position.

The debate between Paul and Krugman reflects a broader disagreement between Austrian and Keynesian economics. Austrian economics, associated with figures like Mises and Hayek, emphasises methodological individualism and the role of individual choice in economic phenomena. In contrast, Keynesian economics, represented by Krugman, focuses on aggregate variables, equilibrium analysis, and societal groups.

Krugman argues that Austrian economics has done the world a great deal of harm

Paul Krugman, a Nobel Prize-winning economist, has been highly critical of Austrian economics, arguing that it has "done the world a great deal of harm". Krugman's critique specifically targets the Austrian Business Cycle Theory (ABCT), which he refers to as "The Hangover Theory". He believes that this theory, which advocates for a laissez-faire approach during economic downturns, caused significant harm during the 1930s Great Depression. Krugman argues that the Austrians, including Hayek and Lionel Robbins, promoted a "do-nothing" policy, asserting that the market should be left alone to correct itself, even if it meant letting "the bottom drop out of the world".

Krugman's criticism of Austrian economics extends beyond the ABCT. He is dismissive of Austrian economists in general, finding their theories unworthy of serious study. He characterises Austrian economics as a "hangover theory", implying that it views economic recessions as necessary punishments for the excesses of boom periods. Krugman strongly disagrees with this perspective, advocating instead for government intervention during downturns to encourage spending and stimulate the economy.

Krugman's economic philosophy is rooted in Keynesianism, which stands in stark contrast to Austrian economics. He believes in the power of government spending to revitalise economies, even suggesting that preparing for an alien invasion could boost economic growth. Krugman's views on taxation have also evolved over time; he initially opposed high tax rates but later supported Alexandria Ocasio-Cortez's call for a return to 70% marginal tax rates.

Krugman's influence as a columnist for the New York Times for 25 years has been significant, and his ideas have shaped economic policy discussions. However, his retirement in 2024 prompted mixed reactions, with some criticising his inability to understand basic economic logic and his sanitisation of state power over the marketplace. Despite his influence, Krugman has been accused of failing to understand Austrian economics adequately and of being "happy to remain in blissful ignorance".

Krugman believes Austrian economics encourages a do-nothing policy

Krugman's criticism stems from his interpretation of Austrian Business Cycle Theory (ABCT). He characterises ABCT as a theory of overinvestment in capital goods and underinvestment in consumer goods. According to Krugman, the Austrians argue that economic crises are caused by excessive optimism, leading to a misallocation of resources towards investment goods. He finds a logical problem with this theory, questioning why transferring resources out of investment goods should cause mass unemployment.

However, Krugman's understanding of ABCT is disputed. Some argue that he oversimplifies the theory and that the sophisticated version, particularly in the writings of Mises, involves malinvestment among various types of capital goods and overconsumption. In their view, credit expansion leads to artificially low-interest rates, which cause entrepreneurs to invest in the wrong lines of production and consumers to believe they are wealthier than they are, leading to increased consumption.

Krugman also takes issue with the Austrian view that government intervention and monetary stimulus are detrimental during economic crises. He argues that the need to reallocate workers out of certain sectors does not necessarily lead to unemployment if it is accompanied by expansionary monetary policy and a temporary spike in inflation. In contrast, Austrians argue that such interventions cause economic fluctuations and impede the necessary corrective recession.

The debate between Krugman and the Austrians revolves around differing interpretations of ABCT and the role of government in the economy. Krugman believes that Austrian economics encourages a do-nothing policy during crises, while Austrians argue that government intervention exacerbates economic problems and that a free-market approach is necessary for stability and growth.

Krugman accuses Rand Paul of being a political opportunist

Paul Krugman, a Nobel Prize-winning economist, has accused Rand Paul of being a political opportunist. Krugman, a columnist for The New York Times, wrote that Rand ""is a political opportunist who will say and do anything if he thinks it will get him closer to a vote of 50% plus 1, in a presidential election". Krugman's accusation came in response to Rand's comment about naming Austrian-school critic Milton Friedman as a candidate to head the Fed. Rand Paul is a self-proclaimed follower of the Austrian school of economics.

Krugman's criticism of Rand extended beyond his views on economics, as he also took issue with his attempt to claim that Friedman would have supported his monetary views. Krugman pointed out that Friedman was contemptuous of the Austrians and had disavowed his own monetary theory. He further stated that Rand's denial was "a sight to behold" and that he looked like an "idiot". Krugman's strong words sparked a debate among readers, with some agreeing with his assessment of Rand's political opportunism and others defending Rand's shift towards the establishment.

The feud between Krugman and Rand Paul escalated when they appeared together on ABC's This Week, where they debated the relative merits of government stimulus spending. Krugman claimed that government employment had fallen under President Obama, to which Rand responded by clarifying that he was referring only to federal employment, which had indeed increased under Obama. Rand accused Krugman of misrepresenting his positions and insulting the intelligence of his readers. Despite their differences, Rand noted that Krugman was "a lot nicer in person than he is on Twitter".

In addition to their economic disagreements, Krugman and Rand disagree on other political issues. Krugman identifies as a liberal and has criticised Rand for his opposition to mask mandates during the coronavirus pandemic. Krugman accused Rand and other libertarians of being "selfish, inconsiderate, freedom-obsessed individualists" who refused to wear masks for the common good. Rand, on the other hand, argued that individuals should have the freedom to choose whether or not to wear masks, rather than being compelled by the government.

Austrian economics is a scholarly tradition

Austrian economics is theory and deductive, and so definitions must be clear, concise, and used consistently. Austrian economics is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.

The Austrian school originated in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. It was methodologically opposed to the Historical school, in a dispute known as the methodology quarrel. The Austrian school theorizes that the subjective choices of individuals, including individual knowledge, time, expectation, and other subjective factors, cause all economic phenomena. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism.

The Austrian school uses the logic of a priori thinking to discover economic laws of universal application, whereas other mainstream schools of economics make use of data and mathematical models. The Austrian school holds that prices are determined by subjective factors like an individual's preference to buy or not to buy a particular good, whereas the classical school of economics holds that objective costs of production determine the price, and the neoclassical school holds that prices are determined by the equilibrium of demand and supply.

The Austrian school rejects both the classical and neoclassical views by saying that costs of production are also determined by subjective factors based on the value of alternative uses of scarce resources, and the equilibrium of demand and supply is also determined by subjective individual preferences. A central Austrian insight is that capital goods are not homogeneous. In other words, hammers and nails and lumber and bricks and machines are all different and cannot be substituted for one another perfectly. This seems obvious, but it has real implications in aggregated economic models. Capital is heterogeneous.

The Austrian school is rooted in the Late Scholastics, who observed the existence of economic law, inexorable forces of cause and effect that operate very much as other natural laws. Over the course of several generations, they discovered and explained the laws of supply and demand, the cause of inflation, the operation of foreign exchange rates, and the subjective nature of economic value.

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