I’ve long promised a post on Austrian Business Cycle Theory, and here it is. For those who would rather get straight to the conclusion, it’s one I share in broad terms with most of the mainstream economists who’ve looked at the theory, from Tyler Cowen , Bryan Caplan
and Gordon Tullock at the libertarian/Chicago end of the spectrum to Keynesians like Paul Krugman and Brad DeLong.
To sum up, although the Austrian School was at the forefront of business cycle theory in the 1920s, it hasn’t developed in any positive way since then. The central idea of the credit cycle is an important one, particularly as it applies to the business cycle in the presence of a largely unregulated financial system. But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.
The result (like orthodox Marxism) is a research program that was active and progressive a century or so ago but has now become an ossified dogma. Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections. To the extent that anything positive remains, it is likely to be developed by non-Austrians such as the post-Keynesian followers of Hyman Minsky.
Update There’s a fascinating discussion linking to this post here. In French, but clear and simply written. Anyone with high school French and a familiarity with the issues should be able to follow the main points.
First, some history and data. Austrian Business Cycle Theory was developed in the first quarter of the 20th century, mostly by Mises and Hayek, with some later contributions by Schumpeter. The data Mises and Hayek had to work on was that of that of the business cycle that emerged with industrial capitalism at the beginning of the 19th century and continued with varying amplitude throughout that century. In particular, it’s important to note that the business cycle they tried to explain predated both central banking in the modern sense of the term and the 20th century growth of the state. The case of the US is of particular interest since the business cycle coincided with a wide range of monetary and banking systems: from national bank to free banking, and including a gold standard, bimetallism and non-convertible paper money.
This NBER data goes back to 1857, but there was nothing new about the business cycle then (Marx, for example, had been writing about it for a decade or more). The US experienced serious “panics”, as they were then called in 1796-97, 1819 and 1837 [1] as well as milder fluctuations associated with the British crises of the 1820s and 1840s.
The typical crisis of the 19th century, like the current crisis, began with bank failures caused by the sudden burst of a speculative boom and then spread to the real economy, with the contraction phase typically lasting from one to five years. By contrast, recessions since 1945 have generally lasted less than a year, and have mostly been produced by real shocks or by contractionary monetary and fiscal policy.
According to the theory, the business cycle unfolds in the following way. The money supply expands either because of an inflow of gold, printing of fiat money or financial innovations that increase the ratio of the effective money supply to the monetary base. The result is lower interest rates. Low interest rates tend to stimulate borrowing from the banking system. This in turn leads to an unsustainable boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if price signals were not distorted. A correction or credit crunch occurs when credit creation cannot be sustained. Markets finally clear, causing resources to be reallocated back towards more efficient uses.
At the time it was put forward, the Mises-Hayek business cycle theory was actually a pretty big theoretical advance. The main competitors were the orthodox defenders of Says Law, who denied that a business cycle was possible (unemployment being attributed to unions or government-imposed minumum wages), and the Marxists who offered a model of catastrophic crisis driven by the declining rate of profit.
Both Marxism and classical economics were characterized by the assumption that money is neutral, a ‘veil’ over real transactions. On the classical theory, if the quantity of money suddenly doubled, with no change in the real productive capacity of the economy, prices and wages would rise rapidly. Once the price level had doubled the previous equilibrium would be restored. Says Law (every offer to supply a good service implies a demand to buy some other good or service) which is obviously true in a barter economy, was assumed to hold also for a money economy, and therefore to ensure that equilibrium involved full employment
The Austrians were the first to offer a good reason for the non-neutrality of money. Expansion of the money supply will lower (short-term) interest rates and therefore make investments more attractive.
There’s an obvious implication about the (sub)optimality of market outcomes here, though more obvious to a generation of economists for whom arguments about rational expectations are second nature than it was 100 years ago. If investors correctly anticipate that a decline in interest rates will be temporary, they won’t evaluate long-term investments on the basis of current rates. So, the Austrian story requires either a failure of rational expectations, or a capital market failure that means that individuals rationally choose to make ‘bad’ investments on the assumption that someone else will bear the cost. And if either of these conditions apply, there’s no reason to think that market outcomes will be optimal in general.
A closely related point is that, unless Say’s Law is violated, the Austrian model implies that consumption should be negatively correlated with investment over the business cycle, whereas in fact the opposite is true. To the extent that booms are driven by mistaken beliefs that investments have become more profitable, they are typically characterized by high, not low, consumption.
Finally, the Austrian theory didn’t say much about labour markets, but for most people, unemployment is what makes the business cycle such a problem. It was left to Keynes to produce a theory of how the non-neutrality of money could produce sustained unemployment.
The credit cycle idea can easily be combined with a Keynesian account of under-employment equilibrium, and even more easily with the Keynesian idea of ‘animal spirits’. This was done most prominently by Minsky, and the animsal spirits idea has recently revived by Akerlof and Shiller. I suspect that the macroeconomic model that emerges from the current crisis will have a recognisably Austrian flavour..
Unfortunately, having put taken the first steps in the direction of a serious theory of the business cycle, Hayek and Mises spent the rest of their lives running hard in the opposite direction. As Laidler observes, they took a nihilistic ‘liquidationist’ view in the Great Depression, a position that is not entailed by the theory, but reflects an a priori commitment to laissez-faire. The result was that Hayek lost support even from initial sympathisers like Dennis Robertson. And this mistake has hardened into dogma in the hands of their successors.
The modern Austrian school has tried to argue that the business cycle they describe is caused in some way by government policy, though the choice of policy varies from Austrian to Austrian – some blame paper money and want a gold standard, others blame central banks, some want a strict prohibition on fractional reserve banking while others favour a laissez-faire policy of free banking, where anyone who wants can print money and others still (Hayek for example) a system of competing currencies.
Rothbard (who seems to be the most popular exponent these days) blames central banking for the existence of the business cycle, which is somewhat problematic, since the business cycle predates central banking. In fact, central banking in its modern form was introduced in an attempt to stabilise the business cycle. The US Federal Reserve was only established in 1913, after Mises had published his analysis.
Rothbard gets around this by defining central banking to cover almost any kind of bank that has some sort of government endorsement, such as the (private) Bank of England in the 19th century, and arguing for a system of free banking that would avoid, he asserts, these problems. But, on any plausible definition of the term, the US had free banking from the Jackson Administration to the Civil War and that didn’t stop the business cycle (Rothbard offers some historical revisionism to argue that the Panic of 1837 didn’t really happen, but that wasn’t what US voters thought when they threw the Jacksonians out in 1840). And free banking in late 19th century Australia (our first quasi-central bank was the Commonwealth Bank established in 1915) didn’t prevent a huge boom and subsequent long depression around 1890. Overall, the US was much closer to free banking throughout the 19th century than in the period from 1945 until the development of the largely unregulated ‘shadow banking’ system in the 1990s, but the business cycle was worse then (how much worse is a matter of some controversy, but no serious economist claims it was better).
To sum up, the version of the Austrian Business Cycle Theory originally developed by Hayek and Mises gives strong reasons to think that an unregulated financial system will be prone to booms and busts and that this will be true for a wide range of monetary systems, particularly including gold standard systems. But that is only part of what is needed for a complete account of the business cycle, and the theory can only be made coherent with a broadly Keynesian model of equilibrium unemployment. Trying to tie Austrian Business Cycle Theory to Austrian prejudices against government intervention has been a recipe for intellectual and policy disaster and theoretical stagnation.
John Quiggin 
And of course the worst thing is that Scrooge wins by doing this – he creates deflation so his useless hoarding increases the value of his hoard (so long as he never uses it).
As for the difference between borrowing for productive (or at least potentially productive) investment and speculation in asset prices (i.e. glorified gambling), I would have thought the difference was simple enough for any fool to tell.
#248 Reason ” you must be the only one who doesn’t understand that bankruptcy is “state sponsored moral risk”
I asked for clarification, didn’t get your sarcasm. I make no excuses. Bankruptcy is a civil way to conduct the affairs of an insolvent entity. That is the purpose of the state to maintain civility in our society.
On your second point, “I’m only confused” because I am not a rational Keynesian thinker (please excuse my sarcasm). At some point scrooge will find it profitable to spend. Those that have gone to wall, will now have a clean sheet, there debt will be written off by state assisted bankruptcy. I pointed out that gradual deflation of assets is acceptable in a civil society to avoid inhumane circumstances. To inflate already overvalued assets is well, irrational, but thats for you to reason through.
The one case where it is tricky is housing where there might be a mixture between a gambling component (land prices) and investment (the house itself). But surely all this could simply be handled by leverage limits based on the nature of the investment.
“At some point Scrooge will find it profitable to spend.”
Actually having deflated the currency and knowing that if he spends a lot at once he will inflate it (since no productive investment has come from his hoarding so capacity has stagnated) his incentives look different to me. And maybe he just likes being richer than everybody else?
Reason – in practice Scrooge just increases the rate at which gold is coined (ie converted to monetary form), increases the profitability that relates to gold mining and improves the incentives attached to the creation of gold substitutes.
Re Bankrupcy is state sponsored moral risk – clearly you didn’t follow the debate leading up to the relatively recent alterations to the US bankrupcy code.
And calling it “maintaining civility in our society” is just euphemism. I prefer to call a spade a spade and avoid false distinctions for the sake of rhetoric. But I hope you at least see the point that you picking up on a point, which may be valid, and claiming it is THE point without demonstrating that fact clearly (and surely that is above all an empirical issue). For me, the same goes for FRB and for interest rate caused “malinvestment”.
#256
No actually they live in an autarchic country without its own gold sources.
#256
I didn’t see the bit about gold substitutes – what a funny idea. Alchemy booms! Or did you mean they will decide to go to a fiat currency after all?
Besides which in all seriously we all know precisely such hoarding countries, they are called feudal or neo-feudal and have proved historically remarkably stable.
Reading back to the start of this discussion, I note that John Quiggin (correctly in my opinion) lambasts the Austrians for not developing their theory since the 1920’s.
I can think of one possible way forward for them.
Ed Phelps, in his book Structural Slumps, presents what he calls a neo-Austrian two sector model. It is not really that Austrian, its theory of business cycles is of the real business cycle ilk but with sectoral dynamics producing greatly attentuated fluctuations (hence the name of the book). No role for monetary policy in business cycles at all.
I think it would be possible to make the model a lot more Austrian, ironically by introducing the Keynesian element of sticky prices, allowing monetary expansion to lower interest rates. From what I remember of the dynamics of the model, below equilibrium interest rates would produce an Austrian style boom and bust cycle, with the bust being the result of over investment.
Of course this doesn’t incorporate other elements of Austrian theory like the financial element/banking crisis element of the bust.
Just a thought…
– Tim
The way forward would be to have one (ONE!) tenured Austrian professor at an Australian university.
It’s unbelievably frustrating to me that cashed-up, tenured mainstream academics criticize the lack of progress in Austrian economics when I saw with my own eyes professors with an Austrian bent pushed out of tenured positions at universities in Australia (Moldofsky, where art thou?).
It’s like starving a patient to death and then saying, “It’s a pity you can’t do more heavy lifting.”
You idiot.
Actually ABOM I wish schoolists would not argue and use tenure to get their schools entrenched. The very same pushing out of tenured positions has occurred in Australian universities to other sides – economic historians and political economists of varying shades. Its time to stop this arrant nonsense of politicising appointments within universities, for economists to have a little respect for different views and schools and dare I say it actually work together and look for similarities not differences. Too Utopian? Well there is always Karma to make me calmer!
Yeah, I agree, but there’s ALWAYS a vicious ugly bitchy fight for scarce resources at the top.
Throughout history, someone in power always has to make a decision: Who Do I Go With?
In all systems (no matter what the color) the response is always: Someone Who Looks Like Me (or at least someone cute).
This brain-dead replication of servile idiots supporting the regime continues until a revolution cuts the heads off these rotting idiots and a new group is installed – who do the same thing for another 100 years.
That’s life.
Unfortunately, the collective stupidity of the servile economics establishment and the lack of revolutionary spirit in the late 20th century has resulted in an excess of rotting heads and a dearth of revolutionary ideas.
And that is the dead end we face today. The end of the line of debt-based “capitalism” that hasn’t really been “capitalistic” since 1913.
Sad.
This institutional inertia has caused the crisis as much as anything else.
If we were still back in the age when we had onlystones and swords and knives we could have sorted this out the “right” way: By openly trying to kill each other.
This modern day method of starving enemies of capital and $$$s is too gutless for my “barbaric” tastes.
Now that does make me laugh because I suspect a grain of truth in it…”If we were still back in the age when we had onlystones and swords and knives we could have sorted this out the “right” way: By openly trying to kill each other.”
terrible to say it but likely true. They say the pen is mightier than the sword ….I think I know why. Pen through that fellows name….cant possibly employ him. Hes from the wrong tribe…oops I mean school!
But why does it only seem to happen in economics? Do the Surrealists in Art try to verbally assassinate the Impressionists? The closest I can get to the heated debates is in Accounting – when the historical cost supporters (the positivists) got ambushed by current cost accounting supporters back in the 1970s ie the normatives (inflation turning balance sheets into surrealist works of art – it was only natural..). HC status quo won and balance sheets are still surreal.
It happens in the medical profession as well. But economics is so close to politics and power it’s not really a science.
Whenever the debate turns to how a society should create and distribute “money” it always (always!) turns ugly because the most selfish amongst us always want to be at the center of that process and will do anything to stay there.
Anything.
I wrote that last post late on a sleepless night, and I am having second thoughts about it. Putting sticky prices into Phelps’ model would just produce a RBC/Keynesian hybrid in which the fall in potential output following an investment splurge was due to something other than inter-temporal labour supply decisions; a little bit Austrian like in that the latter was due to sectoral dynamics, but without the crucial element of an unexpected fall in the rate of profit that would produce a monetary contraction when absorbed by the banking system. The actual mechanism for the fall in potential output in Austrian theory is different; a bit iffy IMHO but I will get to that later.
As far as I understand them, they key features of ABCT are as follows:
1) Capital is composed of heterogenous, clay putty goods with different life spans.
2) Firms are price takers
3) There are no forward markets, and firms expectations of (relative) prices are either static or adaptive.
4) When the interest rate falls below its neutral level due to monetary expansion, firms respond to this price signal by undertaking capital broadening investments in addition to capital deepening investments (higher future supply in response to higher discounted prices is one way of explaining it).
5) They do not forecast the relative price changes (eg real wage increases)necessary to bring forth the labour supply needed to use the added capacity is generate demand for the finished goods, and specifically fail to see that those wages levels woud be above market clearing levels. There is no price discovery from hedging the sales in forward markets. The rate of return on the investment is below the rate of interest, and this comes as a surprise to the business involved, its banks etc.
6) That capacity can only be utilized, and generate the expected returns on the investment, by generating inflation through continued monetary expansion, which generates the labour supply and final demand necessary for this utilization through money ilusion (or if there was equilibrium unemployment, through sticky nominal wages).
7) This is not sustainable, since expectations and nominal wages must eventually adjust to the monetary expansion. When that happens, the monetary expansion goes into reverse, as the unexpected losses take a slug out of bank capital and people withdraw funds from banks, and we get a bust by the same sticky wage/money illusion mechanism as before.
Now it would appear at first glance that (3) is the crucial assumption in the whole story. It occured to me, though, that (2) is just as important.
If firms were price setters (eg imperfect competition) not price takers, they would not typically undertake any capacity enhancement (capital broadening) investments when the interest rate fell.
The exception would be industries in structural stagnation or decline. Here the rate of return on capital generated by the optimal markup was not initially high enough to warrant any capacity increasing investment or even in some cases depreciation covering investment. Capacity installation here in response to monetary expansion is a particularly dire form of malinvestment, but except in economies undergoing profound structural adjustments this response is going to be very small.
Without significant capital broadening (capacity epansion), that leaves capital deepening (cost cutting, productivity enhancing investments). The point here is that there are no monetarily induced rate of return surprises here to produce the monetary contraction in (7), although the overinvestment _will_ depress the future rate of return on investment (a more Keynesian, less Austrian outcome).
Points (1)-(7) give the basic overinvestment story. Potential output is not impaired by the overinvestment, and the subsequent contraction is all output gap driven my the monetary contraction. To get a fall in potential output we need the following:
8) The fall in interest rates in the initial monetary expansion, it raises the NPV of long lasting capital goods by more than the NPV of shorter lifespan goods.
9) This pushes up the relative price of the longer lasting capital goods, and bids resources away from the shorter lasting capital goods. The net result is a shortage of capacity in the sectors that utilize the shorter lasting capital goods, which is held to lower potential output.
Three points here. Can’t a shortage of capacity in one sector and a surplus in another be dealt with by a relative price adjustment. Sure, consumer satisfaction is lower due to the inapropriate pattern of investment, and in GE this will result in lower labour supply and output, but the loss of (potential) output is not proportionate to the capital shortage.
Secondly, the whole “bidding away” seems too equilibrium oriented for the early stages of the monetary expansion, like Von Mises theory of underconsumption. Since wage rigidity and/or money illusion are at play, there are more resources available for all uses; higher production of long lasting capital goods does not need to be at the expense of lower production of the short lasting ones; both are likely to be higher.
Thirdly, (8) uses a scalar interest rate for discounting. In reality, there are a whole set of interest rates of different maturities. Monetary expansion lowers the near term interest rates by more than the mid term interest rates, and the very long term rates not at all. This would at least partly offset the NPV effects in (8).
Any feedback and comments by Austrians (the economists, that is, not necessarily the nationality :-)) would be greatly appreciated.
– Tim
I just realized that I got the point about clay-putty investment under imperfect competition completely wrong. Firms will install capacity to the point here long run marginal cost (including interest and depreciation) equals marginal revenue. If short run marginal costs were flat, output would always be capacity constrained, and marginal revenue above short run marginal cost, in the absense of unanticipated falls in demand.
So capacity installation responds to interest rate movements, except in the special case where capacity is more than firms want.
Mea culpa,
– Tim
anarcho says:
“Not to mention the awkward fact that the whole theory is based on something, equilibrium, which they proclaim does not and cannot exist in a real economy.”
clearly you’ve read as much on the austrians as i have on sraffa! austrian theory is absolutely not based on equilibrium. period.
as for your empirical “proof”, see my earlier comments about the difference between the natural sciences and economics. no reproducibility, no constants.
to tim peterson:
just a quick comment – “sticky prices” do not exist for austrians. of course, unions and i.r. laws can frustrate downward adjustments in wages, but that’s a political artifact only. labour is not seen as any different from any other factor in production in terms of pricing.
Well said newson.
Newson:
Money illusion in real wages works just as well as sticky prices in propagating the monetary impulse, and should be just as confounding to the “bidding away” of resources from short term investments that purportedly reduces potential output. If labour supply is artificially elastic due to money illusion, the bidding process for labour in the capital producing sectors will end up with more labour at work producin both short lived and long lived capital goods.
I haven’t read Burns and Mitchell’s work on analyzing the data for business cycles, but one of the findings I am aware of was that everything moves up and down together for most of the cycle. I assume that this also means sectoral investment levels.
Incidentally, Burns was one of the worst central bankers of all time; he deserves to be pilloried by Austrians and everyone else. But I don’t think that the analytics of his academic data analysis are in doubt.
Getting back on topic: if potential output is not impaired, it casts doubt on the need for a ‘primarary’ let alone a ‘secondary’ deflation.
– Tim
newson
But in fact even where there institutionally is a chance to reduce wages and/or working time firms still regularly sack workers during downturns. Don’t you think you are in danger of mistaking the map for the territory?
True reason – thats what interests me. Sackings always seem to come before price adjustment.
reason – re 204
“S=I is the result of national accounts conventions, so redefine the terms if you like – who cares?”
Yes, its an accounting identity that doesn’t really convey what happens in an economy during credit expansion. The expansion of credit works in similar ways to an expansion of the money supply and allows for increased consumption and increased investment at the same time because we can tap into unused resources which the identity ignores. That is the point about resources not being fully employed and the ability to shift them “in and out” of the economy can give the appearance of an increase of S+I because we are tapping into a type of S that is not included in the national accounts. If you read Robert Higgs’ “wartime prosperity? a reasessment of the US economiy in the 1940s he gives a very clear example of this when he discusses how manufacturing plants were run for many more hours a day during the war than they were prior to the war.
“I don’t think many landlords on Regent Street are leveraged!”
They all paid cash for the buildings they rented? if they borrowed money they were ‘leveraged’ in the sense that they had greater upside in personal gain with greater risk to a fall in prices.
Tim Peterson @ 269,
It looks to me like your description is basically consistent with a telling of the ABCT story. (One of the difficulties with ABCT is that there are several different tellings that are slightly different. The telling here is basically the Mises version, if I’m right. The Hayek version and Rothbard version are a bit different – how much the difference is just semantic depends on who you ask.)
For your three points:
(1) I’m not entirely clear what the “problem” is here. Relative price adjustments can occur, and are actually a necessary condition for correcting the error. I actually feel like Mises says something similar to “the loss in potential output is not proportional to the capital shortage”, precisely because the excess capital in the other sector doesn’t vanish. Here, the “degree” of heterogeneity matters, too. It may be that, after paying some cost, the capital from one sector can actually be converted into capital for the other sector. This would also alleviate any loss to potential output. I’m actually one who thinks that the degree of heterogeneity can help explain the relative severity of recessions, though I haven’t looked into this concept in detail yet.
(2) I was under the impression that labor supply elasticities are often estimated to be roughly 1 (at least estimated from macro data). Microdata find labor supply to be significantly less elastic (often coming up with numbers like .1). So, I agree in principle that if labor elasticity is “large”, then there’s no need for one sector to contract so the other can expand (that is, labor is not “bid away”). But, whether labor elasticity is large or not is an empirical question – and at least the empirics I know of don’t support very elastic labor supply.
There’s also a side point: even if labor supply is elastic, labor and capital are not the only factors of production in the real world. It’s very possible that some other factor (say, energy) has an inelastic supply, and has to be bid away from one sector to end up in the other.
(3) You’re right there. Consider, for example, the recent cut in interest rates by the Fed in the US. From June 2007 to last month, the Fed funds rate fell from 5.25% to 0.15%, 5-Yr Treasuries fell from 5.03% to 1.86%, and 30-Yr Treasuries fell from 5.2% to 3.76%.
However, the amplification from the length of the term may be more than enough to offset the smaller changes in interest rates. It’s not hard to show that a one-time payoff paid in n years will have its present value change by roughly n * (-change in interest rate) when the interest rate changes. So, a payoff 30 years in the future would have seen its present value increase by about 42%, while a payoff in 5 years would see its present value increase by about 16%.
Naturally, the different interest rates will dampen the ABCT effects, but they don’t seem to offset them by much.
To get these effects we have to assume that people expect some significant interest rate persistence. (Running a quick regression of 1yr Treasury rates on 30 yr Treasury rates – with intercept held at zero – I find that a change of 1 percentage point in the 1 yr Treasury rate is associated with a .75 percentage point change in the 30 yr Treasury rate. This is far more than I expected, and suggests that interest rate changes are expected to be persistent – and pretty strongly so.)
So, in very brief:
(1) is perfectly consistent with ABCT.
(2) and (3) are largely empirical questions, and the empirics seem to help ABCT, at least in my mind.
baconbacon
Do you know Regent Street?
Lucas Engelhardt
Be careful to distinguish between real and nominal interest rates.
Lucas,
A most interesting and well thought out reply!
However, on point (2), faced with a low labour elasticity of supply I would revert to arguing that nominal wages are sticky. The proof of the pudding is in the eating; examining the correlation coefficient between detrended sectoral investment levels should settle the issue.
One other issue you might be able to enlighten me on is the exact determinants of investment in this framework. The putty-clay technology on its own would give a horozontal supply curve for capacity, given static or adaptive expectations of relative prices. Without demand to cut this curve, what determines actual investment?
Or does the theory specificy increasing marginal adjustment costs to get an upward sloping capacity supply curve?
– Tim
Correcting Quiggin on Austrian Business-Cycle Theory by Robert P. Murphy
http://mises.org/story/3466
Let’s not forget that the author of the above piece is Bob Murphy, who has written several works on American economic history dealing specifically with monetary history. Plus, he has a PhD in economics from New York University – a top 25 university (in the world, that is) where they teach lots of math.
This is just to pre-empt the commentators who will repeat the tired old refrain that Austrians are “dogmatic” and don’t understand neoclassical economics…it would be nice to actually deal with the arguments for a change.
John Quiggin,
It is clear from your article that you do not understand Austrian business cycle theory. A central bank following a 100% reserve policy with open convertibility would not cause a business cycle. Therefore Austrians would not object to such. How can you make such a fundamental mistake?
BTW Paul Krugman, and Brad Delong have no understanding of ABCT either. In fact Krugman doesn’t even understand money and thinks the labor dollars is equivalent to money. What a marooooooooon.
An Austrian Response:
http://mises.org/story/3466
[…] answered Tyler Cowen and Paul Krugman’s objections, but today’s focus will be the recent critique penned by Australian economist John […]
I’m sorry, but your post just seems like a rehash of all weak criticisms to the ABCT I’ve already read from these authors your cite at the beginning.
I’m not convinced.
Unfortunately Mr Quiggin is unable to grasp the basics of ABCT so is just trying to ridiculize it. I wonder how a professional economist can have such a poor understanding of logics.
The critique falls short in any respect and is just a waste oftime replying as it has been done so many times. Check for instance the limks other readers haveposted
Regards
Austrian economics has been the best theory for the last 100 years, but its time is about to come. The future of our understanding of economics lies within the new ‘complexity economics’ field, rooted in Austrian economics but also in cybernetics, biology and epistemology. In time, Hayek’s and Popper’s legacies will overcome that of Mises. And today’s orthodox economics are tomorrow’s phlogiston theory, as unlikely as it may seem now to its adherents.
I would argue that it was Keynes who put politics ahead of economics.
Are we Austrians dogmatic in our approach and rhetoric or do we not agree on the governmental causes and solutions to the boom/bust cycle? Your post asserts that we are both, but these seem to be in contradiction with each other.
You can’t have your cake and eat it too. Oh, wait, you are a Keynesian and you do believe you can have your cake and eat it too.
[…] economist John Quiggin recently had some criticism for Austrian Economic Theory. Robert Murphy of the Mises Institute delivers their […]
Having just read through this entire thread, I have come to just one conclusion. Economics is essentially junk science – and I’m stuck with a bachelors in it.
Damnit.
Caleb, I’ve not read through this entire thread but suggest that a reason economics seems to be essentially junk science could be that relevant facts are suppressed.
History is full of stories of junk science persisting because proven facts threatened the power of established authorities. Discoverers of relevant facts are discredited or worse.
Need I go on?
Hi,
I’m afraid this peice got completely “pwned” already, right here:
http://mises.org/story/3466
A devastating critique of this critique, that lays bare the basic lack of understanding, and worse, the selective use of certain dates, which cannot be ignorance.
A.
In an effort to distinguish himself as a first mover – a pro-active academic, fighting the good fight – another ill-informed “economist” bites the dust.
Naysayers of Austrian econ are facing a veritable juggernaut. Denying truth is like holding a beach ball under water.
But what would an economist do if he did not believe he could tinker?
Hint: He might actually have to provide something useful to the economy.
Have you ever wondered why Austrian economics is largely seen as the domain of cranks? Comments like (most of) the last dozen or so above provide a pretty good illustration of the reasons.
I should say that the post by Robert Murphy is much more reasonable than some of the commenters from his supporters here and at his own blog. He does make one rather snarky point, but notes in comments that it leaves him open to a sharp riposte from me.
JQ, actually, I’ve often wondered why you feel the need to call those whom you disagree with “cranks” or “dogmatic”, or generalize based on a bunch of comments. The real Austrian economists aren’t busy commenting on blogs, they are doing solid academic work. So how are any of the above dozen comments reflective of them? I can only put it down to intellectual immaturity and/or lack of depth. You’re being the snarky one. Most Austrians have written far more than you on monetary history and economics, so please avoid generalizing based on random blog commentators (including me – I represent myself, not Austrian economics).
The second thing I’ve wondered is why left-wing economists have very strict comments policies? For example, Brad de Long is known to delete comments he disagrees with, and has done so even if the author is tenured professor and used polite language. Is this a reflection of their essentially anti-freedom roots?
Just to provide an example – I think Keynes was the most influential economist of the 20th century. There is no way I can deny his contributions. He was a leading thinker. But JQ, on the other hand, has previously denied that Rothbard made any economic contributions of note (it was in a comment on a previous post on this blog). That is the extent of his snarkiness.
Don’t be so small-minded – Murphy is a real economist, not a blog commentator.
Sukrit, you might want to reread the comments you’re defending, and note the string of juvenile personal attacks and snarks
“What a marooooooooon.”
“completely “pwned”
“another ill-informed “economist” bites the dust.”
“Unfortunately Mr Quiggin is unable to grasp the basics of ABCT so is just trying to ridiculize (sic) it. ”
You seem like a sensible person in general, but it ought to be obvious to you that allies like this aren’t doing you any good.
But you’ve missed my main point. From my discussions, I’m happy to agree that there are some people like Murphy doing serious work in this field, and I say as much in the comment to which you object. But the average person, including me, mostly encounters people like the commenters above as representatives of Austrian econ. That’s what creates the impression of crankiness to which I refer.
And IIRC, the only other group I’ve regularly referred to as cranky are climate delusionists. I hope you’re not going to defend them.
I’d agree that the Austrians you generally encounter online seem like cranks. Especially the Rothbardians.
#Sukrit – re your comment
“This is just to pre-empt the commentators who will repeat the tired old refrain that Austrians are “dogmatic” and don’t understand neoclassical economics…it would be nice to actually deal with the arguments for a change.”
I think there has been plenty of good arguments in this thread in case you hadnt noticed. I actually thought this comment was rather snarky as is Terje’s comment above at 299 on Rothbardians. It doesnt offer anything useful.