Moneyball and Austrian Economics

Moneyball and Austrian Economics

Dear Hank,

I’ve had a number of run-ins with folks who seem to be very concerned about the economy and think they have an answer; or at least, they think whoever is in charge is doing the wrong thing. I typically ask why; what evidence do you have; and what would you do.

The answers I get back are never useful. The why is answered with a statistic or catch phrase; no evidence is ever offered - other than the one statistic that doesn’t support their argument; and the what would you do is usually answered with some wishful magical thinking about getting government out of the way and letting business do its job.

Let’s agree on a few thing right up front. No system has been found to work perfectly, ie there are exceptions to any rule. Most things when taken to an extreme cause problems - typically, moderation is better.

Most recently someone responded to something I wrote about the economic situation in Greece. I think the Greek situation is tragic and many of the measures being adopted aren’t probably going to work. This led someone to question the stimulus spending in the U.S. They claimed it was a waste of money because once the money is spent the jobs go away and the economy is no better off. Well, is that true? And then the question is what would one do differently? The answer to the last question from these folks is cut government spending (kill the unions, etc.), and shrink the deficit. The question I always ask is, “Do you have any examples where this has worked?” You can talk theory, history, recent times; I know of no cases where this has been successful. By successful I mean a healthier more robust economy then before you did any of the cut and shrink suggestions. I do have plenty of examples of it not working.

Let’s talk fairy tales and history, when has it ever been the case that the King (the president), the nobles (the rich), and parliament (the congress) decided that they would screw over the peasants and enrich themselves that this helped their economy and didn’t lead to some kind of revolt or economic chaos?

History is littered with examples. The Eastern Roman Empire existed for over 900 years, every time the large landholders became powerful they passed laws to exempt themselves from paying taxes and the small land holders and little merchants had their taxes increased until those people literally ran for the hills; there was no money in the treasury because there was no one left to tax. Yet, when the middle class was allowed to prosper - and that meant holding the rich and powerful in check; a difficult job for the emperor - trade increased, farming increased, production increased and tax revenue went up without being too burdensome. Is there an example contrary to this? I don’t know of any.

This brings me to Ron Paul and his comment, “We are all Austrians.” He was referring to the idea that we all subscribe to the school of Austrian economics. I’ve heard of this strain of economic thought but never really looked at it much. Well, this is shocking to hear but it is outside of the mainstream of economic thought. It rejects the idea that you can use mathematical models to predict anything about human behavior and the best thing to do is let laissez faire policies take hold. That means the government should do nothing and let things play out as they may.

This is fine if you’ve got a level playing field and everyone wants to do good, but when has that ever been the case? If you bring a pea shooter to a battle and the other side has a full division of tanks who’s gonna win? If the game is rigged to let someone else win what chance do you have? Very little, if you are lucky you can join the other side and screw your friends and neighbors but otherwise you’re lose.

Let me break down the fundamentals of capitalism. In a pure supply and demand model where there are no barriers to entry the suppliers compete by lowering their prices to attract business (ie demand.) How low will they go? Theory says they’ll go to the point where they make no profit. History says they’ll go even lower. They’ll borrow money to try and stay afloat; hoping that things will get better. When they can no longer borrow and no longer pay they go out of business (they run for the hills, go bankrupt, call it what you will.) So, who ends up owning the scraps? The rich, the powerful, etc.

A true capitalist wants to make a profit. A true capitalist wants nothing to do with pure supply and demand. Let me break it down to the simplest question I have ever been asked by a venture capitalist, and that I think captures the essence of real world capitalism and I think this statement has been true throughout the ages, “How do I get an unfair competitive advantage?”

That’s it. A true capitalist wants an unfair competitive advantage. Let’s put aside all the fancy talk - how can you get an unfair competitive advantage? Some methods of unfair advantages are socially acceptable, some are not, some are borderline. Is buying a company for less than it asset value and selling off those assets socially acceptable? It depends on which social circle you travel in. It also helps if you couch what you did in more grandiose terms and shift the blame elsewhere - case in point Mitt Romney and Bain Capital. If you have a patent or knowledge that others don’t you have an advantage. If you can get the king, the lords, and/or the parliament to give you contracts, dispensations, or rules in your favor you have an advantage. If you can kill your competition (say with a bullet to the head as drug gangs are doing in Mexico) you have an advantage. So if you are a true capitalist you want to figure out an advantage and if you have got one you certainly don’t want someone getting in your way, say by preventing you from shooting your competition in the head or forcing you to spend money on worker safety or paying people more.

Here’s the thing about The Austrian Economics that’s so in line with current conservative thinking. It depends on magic.

Have you ever seen the cartoon where two professors are standing in front of a blackboard filled with equations and one of them says, “And then a miracle happens.”?

That’s Austrian and conservative economic theory in a nutshell. Let’s throw in a little “Aw shucks, I don’t know nuthin’ “ kick sand on our shoes for some homespun goodness but when you finish the analysis that’s what you’ve got: magic and ignorance.

Let me explain. The Austrian economic theory says you can’t reduce human behavior to a bunch of statistical and mathematical models. Humans are too complex. Therefore the best thing to do is throw up your hands and let the chips fall where they may (ie laissez faire economics). They also have thoughts about credit and bubbles but let’s save that for another post. Conservatives seem to think in a similar way with a huge dose of “We don’t want the government telling us what to do.” Okay, who does? No one that I know of.

However, let’s go with the hands off model and someone gets to be so powerful or a group gets to be so powerful that they can manipulate the game. My question is “At that point do you still want to play the game?” The answer I get varies between: I don’t believe it, let me quote the statistic I gave you before that doesn’t prove my point, and I believe in the hardworking people (or the country, or the economy, or something). Well, that’s fine, I believe in all that; how does that help the situation? At this point we go back to the same answers until I’m either called names or they go silent. (Often times racist or religious implications are thrown in with a nod nod wink wink you understand quality and when I say I don’t understand and would they please explain I’m told I don’t get it. To which I say oh yes I get it - you are a racist or religious bigot and then the conversation goes silent.)

Here’s the fascinating thing about Mr. Paul and the Austrian model of economics. It rejects the idea that you can be at all predictive of human behavior. Well, I just watched Moneyball the movie based on the Michael Lewis book that shows how the 2002 Oakland A’s revolutionized the game of baseball by creating statistical models that predicted human behavior. So it can be done, if you’re willing. If you’re not, well, try magic.

Enough for now.

I gotta go a Nigerian relative that I never heard of just died and left me seventy five million ponds sterling.

Take care,

Bryce