Brad DeLong on Larry White

I read the Larry White piece in Cato Unbound a few weeks ago and learned a thing or two from it. Very well-written and well-reasoned. White is an Austrian economist, and a very good monetary theorist by what I am told. Brad DeLong writes an uncharacteristically polite, but characteristically rigorous, response. I thought this closer was correct, and I agreed.

So why does Larry White’s diagnosis of what is going on differ so much from mine? I think that what is going on is a characteristic weakness of the Austrian tradition: the baseline assumption that all evils must have their origin in some form of government misregulation. If government could be drowned in the bathtub, then an Eden in which people indulged in their natural propensity to truck, barter, and exchange would emerge. And this automatically rules out what I regard as the most likely and fruitful road to walk down to understand this financial crisis: the road that starts from investigating how human psychological limits lead to bad private-sector contract design that then magnifies psychological biases.

That bias is why the austrians are stuck. The best of the Austrian tradition did not have such a bias. The worst are ideologues for whom it was written "to a child with a hammer, everything is a nail."