The Left vs. Austrian Business Cycle Theory
Finally an attack on Meltdown. It comes from leftist Matthew Yglesias, whose knowledge of business cycle theory I leave you, dear readers, to judge for yourselves. The Austrian theory of the business cycle has been "superseded," our expert tells us. Yes, because the mainstream view of capital -- a gigantic, synchronous blob we can represent in a single magnitude -- is just so much more sophisticated than the Austrian, don't you know. (Ahem.)
Comments are enabled on his site.
I'm on vacation or I'd write a full-fledged smash. That will have to wait a few days.
Comments (60)
Eric Parks
Well, I just peeked over to the poor chap's website. It seems to be overloaded with Austrian intellectual prowess. Mr. Yglesias should really have anticipated this outcome.
No doubt he will respond with ad hominems galore.
Published: May 6, 2009 3:44 PM
David Spellman
Just getting a reference to the book is going to be helpful. Being ignored is worse than being criticized. Your enemies hate acknowledging you but becoming influential infuriates them into saying something :).
Published: May 6, 2009 3:44 PM
Libertas est Veritas
That was an attack? Seems to me the guy just scrounged together a bunch of anti-ABCT articles and said: "here, I hope some of this sticks because I don't really know anything about this stuff myself".
Published: May 6, 2009 3:45 PM
fundamentalist
Austrian commenters did a great job on Yglesias site!
But I wonder about the standard ABCT emphasis on interest rates set by the Fed. Hayek shows in "Monetary Theory and the Trade Cycle" that the growth in credit can happen without changes to Fed policy, even though the Feds could squelch it. And in "Profits, Interest and Investment" Hayek demonstrates that relative prices drive the cycle while interest rates don't change. I wonder why contemporary Austrians don't emphasize those points?
Of course, the truely absurd part of mainstream econ is that it assumes everyone knows everything and exactly the same things, but they can't explain why prices change if that's true.
Published: May 6, 2009 5:02 PM
Arend
It's interesting how the guy can find the 'criticisms' on the ABCT but not showing any understanding of the ABCT itself. So he can use Google, so what?
(The Brian Caplan criticism on the ABCT is btw highly overvalued, even in Austrian circles, imho the guy is clueless.)
Published: May 6, 2009 5:03 PM
geoih
Thanks for reminding me why I don't bother reading Marginal Revolution.
Published: May 6, 2009 7:09 PM
Tyler
haha! I love your sarcastic remarks! The ways of the mainstream economist are too high and lofty for us down here to grasp...
Published: May 6, 2009 7:22 PM
MarkB
I would love to see a rebuttal to John Quiggin's post mentioned in the Matthew Yglesias article.
Link here:
http://johnquiggin.com/index.php/archives/2009/05/03/austrian-business-cycle-theory/
Published: May 6, 2009 7:52 PM
s burgess
fundamentalist.. great point from new zealand and we had in fact i think a larger housing boom yet our monetary policy was far more tight.but it may of been due to other facters on banking and houseing but i dont want to guess to much.we have always been keen on houses to begin to build a home we had to pay 80000 dollars just to be allowed to in my town.but what you just said has been in my mind alot.
Published: May 6, 2009 8:28 PM
Haas
One of the "intelectuals" who commented on the site:
"Radical Austrian perspectives have a long history on the right and their presence today isn’t surprising."
Radical!!! so i guess all who believe in spending only what you have and not getting bankrupt...is a radical! a terrorist maybe? lol
Published: May 6, 2009 8:44 PM
Alex Mullins
I just read this blog and I must say that he doesn't understand ABCT at all!
Another thing, he says "but conservatives have been increasingly critical of Ben Bernanke who, as best one can tell, is a rock-ribbed right-winger appointed to office by George W. Bush." I don't think anyone here supported George Dubya or supports Helicopter Ben who is reading out of Keynes' playbook.
Tom I hope you return and write a smashing response to this guy.
Published: May 6, 2009 8:59 PM
Conza88
Mark B - as would I. It's just that it probably won't be able to be done on his site. The socialists are very apt at shooting down dissent, no matter how trivial.
I commented on his discussion policy in an open forum - Rule no. 1
"1. This is a forum for discussion. I publish it at my own expense and in my own time. It is not a public place. There is no automatic right to comment here."
Absolutely hilarious. Private property hater, stands by private property! Haha and I'll enjoy reading whatever attempts at justification you can come up with.
Response: 'Conza88, IP [removed], consider yourself permanently banned. Yet another Austrian school defender of absolute property rights who has no respect for those of anyone else and gutlessly hides behind a pseudonym. With a Youtube site revealing a Ron Paul fan - what a surprise.'
I guess he didn't appreciate his hypocrisy being pointed out..
Published: May 6, 2009 9:37 PM
Michael J Green
MarkB: I don't much see the incentive to respond to Quiggin's post. I can't claim to be a very well-read Austrian (working on it, though!), but I noticed several errors, misunderstandings and logical fallacies.
As for Yglesias, that article read like low-brow partisan hackdom.
Published: May 6, 2009 9:39 PM
Greg Ransom
Austrian economist: So tell me, what is capital?
Mainstream economist: K
Austrian economist: If you're modeling growth across time, what represents production processes in your model?
Mainstream economist: K
Austrian economist: If your building a model of the business cycle, what stands in for the time structure of production?
Which reminds me of my joke:
Mainstream economist: K
Austrian economist: Last night I banged the bejesus out of your wife.
Mainstream economist: K
Austrian economist: I guessed as much.
Published: May 6, 2009 10:35 PM
Dennis
Yglesias got into some debate with Roderick Long a few months back and it was pretty evident that the guy is way out of his depth when arguing with someone with any real background in Classical Liberal thought.
Published: May 7, 2009 1:53 AM
Alexander S. Peak
I know I'm probably repeating myself here, but libertarianism is the true left.
Cheers,
Alex Peak
Published: May 7, 2009 2:25 AM
xbones
The Cantillon effect explains how newly created money dissipates throughout the economy, thereby changing the relative prices of all goods. Thus additional money constitutes additional demand in the short run and inflation in the long run. The ripple effect of inflation, which constitutes the middle run, is ignored in mainstream economics textbooks. (I know that Blanchard: "Macroeconomics" discusses the middle run, but he relies on the Philipps curve).
Lowering the interest rate tends to create a bias favouring investment over consumption. These mailinvestments are unsustainable.
Therefore Austrians need to stress both interest rates and inflation.
I had several problems with the article mentioned above.
(1) According to ATBC, consumption should shrink during the boom phase because of the high amount of investments; this is empirically false. - Answer: Both consumption and investment can rise during a boom, but the malinvestments are unsustainable.
(2) Austrians should like regulations and dislike the free market. - Answer: We need adherence to the rule of law instead of new regulations. Banks runs are possible because of fractional reserves. These are immoral, unjust and fraudulent if natural law is considered (see Huelsmann: "The Ethics of Money Production". Banks should honor contracts like other companies and not enjoy bank holidays, FDIC, defaults, and fractional reserves.
Some people say that each Austrian economist recommends another policy. But there are many ways which tend to credit expansion: lower interest rates, lower risk premiums by regulation (FDIC, reserve requirements, etc.), and others. Remember that nominal interest rates consist of (1) real interest rate, (2) inflation premium, (3) risk premium (see Garrison: "Time and Money").
I compared many business-cycle theories and the ATBC seems to be the one which fits best to reality.
Published: May 7, 2009 2:55 AM
Inquisitor
"(The Brian Caplan criticism on the ABCT is btw highly overvalued, even in Austrian circles, imho the guy is clueless.)"
I agree.
Published: May 7, 2009 3:36 AM
Libertas est Veritas
I read through Caplan's and Quiggin's criticisms and quite honestly, they weren't of a very high calibre.
Especially Caplan's argument that entrepreneurs should know what the natural rate of interest rate is and should calculate based on that, instead of the artificial rate, is wholly absurd. How would one person even figure out the correct rate, if the rate itself is composed of millions of subjective valuations? So unless I've completely misunderstood his argument, he is basically saying that because individuals can plan their own actions, they should also be omniscient and be able to know the actions of everyone.
And the Quiggin criticism was more of a "Austrians are dogmatic!" diatribe than an actual argument. He doesn't really go into much detail and seems to assume that the ABCT only pertains to central bank created inflation.
Someone at mises.org really should make a comprehensive list of good criticisms. I'd enjoy reading those, but these 5 paragraph blogposts don't really offer any insight.
Published: May 7, 2009 4:36 AM
Conza88
Alexander S. Peak
"I know I'm probably repeating myself here, but libertarianism is the true left."
There is no "left", and there is no "right"... They are a false paradigm. Libertarianism is going NOWHERE, unless you reject both.
The only alternative is Individualism vs Collectivism. Freedom vs Coercion.
Forwards towards Liberty (Individualism) or Backwards towards Tyranny (Collectivism).
Published: May 7, 2009 4:48 AM
dewind
Anarcho is an interesting commenter who has a clear distaste for American libertarianism and Austrian theory. But I am always confused by anarchists -- collectivism without government? Individualism is bad? What?
Published: May 7, 2009 6:11 AM
MarkB
Michael J Green,
The point I see in rebutting John Quiggin's post is to engage in some good old intellectual debate. I find this is where the real magic shines, and healthy debate can only help solidify the Austrian business cycle theory a bit more, to more eyes.
Libertas est Veritas,
You bring up a good point about entrepreneurs calculating against the natural interest rate. I was trying to get my head around this criticism when reading Quiggin's article, but you've just helped me with this. You're right: an entrepreneur cannot know the natural free-market rate of interest, and hence calculate based on this, because this information can only be obtained through due market process over time. (I think Hayek referred to this as a knowledge problem or something, I can't remember the exact term). I suppose the negative of this, as an argument, is it isn't readily falsifiable, so opponents to the theory would use that against the theory.
But, I suppose the response to this criticism could be, that if one could know what the natural free-market rate of interest is, then the whole system of central interest rate manipulation would work, and we wouldn't be facing another recession/depression now. But, the fact that we are facing tough economic times, because of incorrect judgements of what the rate of interest should be, then the people supposedly best equipped to make these decisions, could not make them correctly. Let alone the ordinary entrepreneur...
Published: May 7, 2009 7:24 AM
fundamentalist
s burgess: " ...we had in fact i think a larger housing boom yet our monetary policy was far more tight."
Yes, Mises often said to not look at the absolute rate of interest as an indicator of policy because interest rates may be high in a country with abundant capital if the demand for capital is high, too.
Hayek in "Profits, Interest and Investment" spends some time at the end of the essay talking about how changes in interest rates don't concern businessmen for the most part. Also, if a business borrows at low interest rates, the owner doesn't care if the Fed raises rates later; he will still owe money at the rate at which he borrowed it. An increase in interest rates doesn't make his business less profitable; it makes it less profitable to start new businesses or get new loans for existing businesses.
Businesses don't fail simply because the Fed raises interest rates, or they rise on their own. They fail because the shortage of capital increases the costs of inputs for capital goods producers. The capital shortage results from the fact that consumers have not reduced consumption, but instead have increased consumption of durable goods due to low interest rates. At the same time, demand for labor-savings capital equipment falls as consumer goods producers switch from capital to labor intensive methods of production. So the capital goods producers get squeezed from falling demand and prices and rising prices of inputs.
Published: May 7, 2009 8:01 AM
Tom Woods
Fundamentalist, point well taken about interest rates; I'll be elaborating on this in an article or two I plan to write this month. One thing, though: the rise in interest rates that occurs as the boom progresses (if the monetary authority does not intervene sufficiently) is more important than you suggest, I think. This rise "only" affects new businesses and the expansion of existing ones. But the latter case is key: if credit has been extended beyond the level of voluntary saving, business costs wind up being higher than anticipated as firms bid up the prices of unexpectedly scarce factors of production. These increased costs will necessitate more borrowing, this time at the higher interest rates.
Published: May 7, 2009 8:11 AM
fundamentalist
Dr. Woods, I'm not trying to put forward my own interpretation of the ABCT. I'm trying to reconcile what Hayek wrote with the way the theory is presented by Austrians today. I think some points of Hayek's are being neglected and if there is a good reason for doing so. Even in PII, Hayek assumed that interest rates below the natural rate started the boom. But it seems he held the rates steady to show that the bust would come even if the Feds did not raise interest rates.
Published: May 7, 2009 8:54 AM
Current
Mark B: "Hayek referred to this as a knowledge problem or something, I can't remember the exact term"
A _discovery process_.
What Fundamentalist and Mark B are saying here is something that is quite a familiar problem when a subsidy is made.
Consider if iron is subsidized. This makes use of it more attractive rather than use of substitutes. This affects businesses some way away. For example, garden furniture suppliers may be affected. They may see more business because more people prefer iron benches in their gardens.
The same is true of debt. If debt is subsidised that does not directly affect enterprises that don't use debt. It does though affect them through other enterprises that do use debt.
Published: May 7, 2009 8:55 AM
newson
to s. burgess:
to be clear, new zealand has a very expansive monetary policy over the last decade (every m has more than doubled).
http://www.econstats.com/r/rnew__m8.htm
Published: May 7, 2009 10:01 AM
Current
newson: "to s. burgess: to be clear, new zealand has a very expansive monetary policy over the last decade (every m has more than doubled)."
Also, capital markets are international now. Many New Zealanders borrowed from Japan where the interest rate is nearly zero. Now both sides have lost their shirts.
Published: May 7, 2009 10:14 AM
GC
Putting Yglesias on the Godwin clock...
tick...tock...
How long before someone brings up...
Pinochet
United Fruit
Nazis
Hitler
...tick...tock...
Published: May 7, 2009 10:23 AM
Manny Mars
Hi, I have an economic theory Im working on and I'd like as much critisism as possible. It is called: The Theory of Primary and Secondary inflation. Has a lot to do with the interest rate. Let me know if you'd like to hear more.
Also I have a challenge for all. I would like to see the dictionary change the def. of inflation to what it really means. This may seem small or petty, but very important to me! I have a friend of mine that refuses to accept inflation simply is the expanssion of the money supply! His reasoning? Because Webster is the sole authority on words in the english language. That broke my heart due to the fact that he is not only my best friend, but worse yet, "Educated". So it may not seem much, but I think it would be a great vicory for all if we could make that Change! The effects would be much greater than you realize. Lets make it happen.
Manny Mars
Ron Paul 2012
There is a better way. We the people, not the Bank.
Published: May 7, 2009 10:48 AM
Current
In the past increase in the money supply were called "inflation". Increases in the price of a basket of goods were called "price inflation" or something similar.
Today price inflation is just called "inflation". Increase in the money supply are called just that or they are called "inflation of the money supply". I think it's best at this time to abandon the older words and adopt the newer ones.
In many ways the newer words are better because the word "inflation" can be included in each, showing that they are linked.
Published: May 7, 2009 11:27 AM
Manny Mars
I think thats what adds the confusion among the public. You and I are fortunate to know AE, and thus really understanding what inflation is. Most people don't, and "expanding" the def. of what inflation simply was, functions much like the expansion of the money supply, it causes distortion. I know we all here would like to return to sound money correct? but as around, what is money? Well we have to return to sound def. of the terms we use. Hard to return to something that you do not recognize.
Published: May 7, 2009 11:48 AM
Phil
@Current - agreed. Many times I have discussed this with my brothers who do not understand the effects of inflation (increase in money supply). For example, right now the increase is being held as reserves within the banks to mark down the unbelievably stupid leveraged position. I am actually a bit fearful of the day when banks start unleashing these reserves....
Published: May 7, 2009 11:50 AM
Manny Mars
Exactly, this is why we even have people who attack brilliant writers like Dr.Woods. There would really be no need to attack once people knew what they were talking about to begin with. I think its dangerous when people think that the results of inflation are inflation..thats how we repeat our history with price and wage freezing (which I think can happen again)
Published: May 7, 2009 11:57 AM
Manny Mars
Exactly, this is why we even have people who attack brilliant writers like Dr.Woods. There would really be no need to attack once people knew what they were talking about to begin with. I think its dangerous when people think that the results of inflation is inflation..thats how we repeat our history with price and wage freezing (which I think can happen again)
Published: May 7, 2009 11:58 AM
AC
As was mentioned earlier, this is good news about criticism of Dr. Wood's book by political hacks. I believe the political establishment is beginning to get a bit apprehensive. I don't think they're scared just yet. No, that won't happen until the late 1970's era stagflation kicks in. Personally, I'm giving the inflation train about 18-24 months to leave the station. Then they'll be scared as the public and other nations holding our debt and dollars start yelling. Who knows, we may even get an audit of the Fed.
I am optimistic that the general public will begin to see gov't interventionism into our lives as a net loser. I have hope that they will also see the problem with the 2 dominant political parties. I've come to see them as 2 sides of the same coin. One party wants to push your car off a cliff, the other wants to blow it up. Either way, your car is destroyed.
Published: May 7, 2009 12:07 PM
Current
I agree with you that the words cause confusion. Alas we have to live with it.
Published: May 7, 2009 12:40 PM
Michael A. Clem
Would you turn to the dictionary for the scientific definition of "work" (The result of force applied to an object over a distance, or W = F * D). Yet people use "work" in a variety of ways. Similarly, if economics is a science, then the economic definition of inflation must also be precise, even if common usage is different.
Published: May 7, 2009 1:34 PM
Alexander S. Peak
Dear Conza88,
I define left v. right based on one's approach to ethics and natural law. Those who reject any "authority to aggress," who are complete voluntaryists, are on the far left of this spectrum; those who adopt an ethically nihilistic stance, who hold no principled objection to Antiphon or Mussolini, are on the far right; and most people are in the inconsistent middle.
(My spectrum is a bit more detailed than this, but this should suffice for a basic description thereof.)
Regards,
Alex Peak
Published: May 7, 2009 2:43 PM
Fallon
Tyler Cowen told Russ Roberts in an interview that monetary inflation of about 2-3% a year is correct policy because workers will rebel in a deflationary environment. Maybe our society will learn to deal with deflation but not in the foreseeable future, Cowen continued. Cowen rationalized his recommendation on psychological grounds.
Cowen also stated that if he were put in charge of fixing economic woes that he would do exactly as Ben Bernanke has done. Cowen is a big fan of Heli Ben and remarked that, if given the power, he would actually call Bernanke and ask him what to do.
Is George Mason U really a hotbed of free-market thought?
Published: May 7, 2009 3:49 PM
DNA
Tyler Cowen is a tool. His entire blog is his audition to be court libertarian at some place like the New York Times. The fact that he regards partisan hacks like Yglesias and Brad DeLong as respectable men tells you all you need to know about him.
Published: May 7, 2009 4:51 PM
DNA
Tyler Cowen is a tool. His entire blog is his audition to be court libertarian at some place like the New York Times. The fact that regards partisan hacks like Yglesias and Brad DeLong as respectable men tells you all you need to know about him.
Published: May 7, 2009 4:52 PM
esq32
All dogs barking up the wrong tree don't make it the right one.
Hear, here.
Published: May 7, 2009 6:40 PM
P.M.Lawrence
Scott Sumner has been having a fairly balanced discussion of these issues.
Published: May 7, 2009 9:10 PM
Peter
I have a friend of mine that refuses to accept inflation simply is the expanssion of the money supply! His reasoning? Because Webster is the sole authority on words in the english language. That broke my heart due to the fact that he is not only my best friend, but worse yet, "Educated".
Obviously not very well educated, if he thinks Webster is any kind of authority at all...never heard of the Oxford English Dictionary?
Published: May 7, 2009 9:22 PM
Current
Tyler Cowen ignores the fact that Unions have been negotiating pay based on an increment of the CPI/RPI for decades now. They even did it in the 30s. They can calculate for the case when CPI is zero.
The quality of Cowen's output has certainly decreased recently. He is a very clever man, but also very ambitious. I think his ambition is getting to him.
He understands the Austrian critique of mainstream macro. He wrote about it several years ago. Now though he has written a textbook on mainstream macro.
Published: May 8, 2009 5:16 AM
fundamentalist
Cowen wrote that Austrians must think that businessmen have thin skulls because the ABCT teaches that businessmen borrow when the Fed's lower rates and get caught when the Fed's raise rates. I would like to ask Cowen why the Feds reduce rates if businessmen don't borrow when it does. And if the Fed lowers rates and people don't borrow, then what will the Fed do? It will lower rates again and keep lowering rates until a lot of people start borrowing. And those people who borrow know that the Feds will raise rates eventually, yet they borrow anyway.
The ABCT doesn't posite something theoretical that doesn't happen in the real world. Austrians have seen that people borrow more when rates are low, knowing that rates will eventually go up. Cowen seems to think that people don't borrow more at lower rates because they know that rates will go up eventually, yet that's exactly what we see happening.
Cowen reminds me of the joke where an economist and a friend are walking down a sidewalk and the friends notices a $20 bill on the sidewalk. The friend tells the economist that he sees a $20 bill and the economist says it couldn't be. If it were a $20 bill someone would have picked it up.
I would certainly like to hear Cowen's explanation as to why people are borrowing now at today's very low interest rates when they all know that rates will go up again soon.
Published: May 8, 2009 8:09 AM
Manny Mars
Michael A. Clem
Would you turn to the dictionary for the scientific definition of "work" (The result of force applied to an object over a distance, or W = F * D). Yet people use "work" in a variety of ways. Similarly, if economics is a science, then the economic definition of inflation must also be precise, even if common usage is different.
wow, thanks a mill. I tried to explain that to him, but I like your answer much better. Thank you for the additional insight. I still believe that it needs to be common knowledge that inflation is the expanding the money suppply.
Published: May 8, 2009 8:11 AM
fundamentalist
PM Lawrence, I visited Sumner's site for a while and tried to discuss Austrian econ with him and Bill Woolsey, but it's clear that they don't understand Austrian econ and don't want to. Their discussion techniques are very much like those of socialists. They don't understand Austrian econ, but they latch on to bits and pieces that they think they understand and stomp on them. They ignore evidence that disproves their thinking and insert comments that are irrelevant to the topic.
I've been very disappointed with mainstream economists in general. I had hoped that they honestly wanted to understand the economy better and would accept a few ideas from Austrian econ. After all, they have received plenty of criticism from the press and a few economists for their utter failure to see this crisis coming. But instead of learning from those who predicted this crisis, they divert attention from their failures by attacking the only successful school of economics in existence. Makes me have flashbacks to junior high!
Published: May 8, 2009 8:15 AM
Manny Mars
fundamentalist, you know what would be nice, if AE can get some real air time on shows like meet the press, or good morning america. Ron Paul did a good job putting us out there, but we need more.
Published: May 8, 2009 8:33 AM
DNA
Fundamentalist, have you read Huelsmann's take on the whole "rational expectations" critique of ABCT:
http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf
This is a vitally important paper; I wish more Austrians would be aware of it.
Published: May 8, 2009 9:43 AM
Current
"Cowen wrote that Austrians must think that businessmen have thin skulls because the ABCT teaches that businessmen borrow when the Fed's lower rates and get caught when the Fed's raise rates. I would like to ask Cowen why the Feds reduce rates if businessmen don't borrow when it does. And if the Fed lowers rates and people don't borrow, then what will the Fed do? It will lower rates again and keep lowering rates until a lot of people start borrowing. And those people who borrow know that the Feds will raise rates eventually, yet they borrow anyway."
Yes. It must be recognized that this behaviour isn't at all irrational.
If I am prepared to pay 6% for a loan I will still take out a loan at 2%. In fact, if I can find high yielding investments I will take out a bigger loan and use it to invest.
I cannot see the picture of the whole economy. So my rationality is limited by the availability of information. It is a situation of asymmetric information. (Mises pointed this out in Theory of Money and Credit long before the term was coined).
Published: May 8, 2009 9:43 AM
fundamentalist
DNA, Yes, I have read Huelsmann's paper. While he makes some very good points, I wasn't greatly impressed. His "essentialist" argument concluded that an institution must exist that makes it impossible for people to calculate correctly, but I don't see why fractional reserve banking couldn't fill the role of the institution that blinds businessmen.
Current: "It is a situation of asymmetric information."
It's that and more. Ignorance isn't the same thing as irrationality. Everybody can't know everything and exactly the same thing as everyone else as mainstream econ supposes. People act rationally on what they know, but they don't know everything.
In addition, you have mainstream economists drumming into everyone's head that money doesn't matter. The Fed can lower interest rates and it doesn't cause any harm. So you have a situation in which the authorities, mainstream economists, are telling people that low interest rates won't cause any harm, so go ahead and borrow. Then they blame people for borrowing.
If you sweep away the mainstream BS, what they are really arguing is that the monetary theory of trade cycles is wrong. It's that assumption that enables them to say people won't borrow at low rates if they know that they will be harmed when the rates go up. They assume the monetary theory is wrong; no one has proven it wrong because they can't. So they use the socialist methodology of discrediting a theory--snearing at it.
It's interesting that Cowen gives a balanced presentation of the neo-Keynesian business cycle and the Real Business Cycle theories, the two most failed theories in the history of economics, while ignoring the monetary theory completely. We have the neo-Keynesian and RBC theories to thank for the current crisis. The critics of mainstream econ are criticizing those theories without knowing about them.
If mainstream econ has any competitive advantage of Austrian econ it exists only in mainstream's marketing ability to peddle BS as perfume.
Published: May 8, 2009 10:08 AM
Ron
A friend once told me that he thought inflation was good because it "keeps the middle class in check." His reasoning is that if buying power increases too much the middle class will no longer have any reason to "do their duty" and continue working.
I was stunned.
Published: May 8, 2009 10:26 AM
Current
Ron, that is a common point of view. Often people on the left argue that inflation require middle-class people to keep working, which allows them to be taxed and for the tax to be redistributed.
Paul Samuelson often said that inflation makes the distribution of wealth more even, though not for that reason.
If you take all of the redistribution methods though it is difficult to say if inflation is a regressive or progressive form of taxation.
Published: May 8, 2009 10:46 AM
Manny Mars
Ron, sadly, I've heard that a lot too..Im shocked every time I do. People don't understand what inlfation really does. When kings would collect taxes in Gold they would debase them by taking gold from the coins, and mixing the rest with lesser metals. Inflating the economy. Counterfiting."Fractional" gold coins were passing as pure gold coins. Fast forward to when gold certs came into play. When you print more paper (Note that certs are contracts. a promise for what the free market chose as money; Regression Theorem-Mises) than there is redeemable money, and that paper is acting as genuine gold certs within the economy, it is very destructive. AKA Fractional Reserve banking. It is communicating to the the free market that there is more capital within the economy than there is. Sound fimilliar? That disrupts intertemporal market coordination (Hayek). Unilarterally shifting consumer time preferences. Causing malinvestments. Misallocation of capital goods. Yes, in one sence a printing press can creat more "money", but cannot create wealth. Production brings forth goods which is our real measure of wealth. Money is just a facilitator to attaining these goods (Mises) (also Im not forgetting that money is a good itself-though not a consumption or production good). But printing more money beyond the pool of goods brought about by actual savings accompanied with real production brings about the artificial booms. Think of the time lags that Mises talks about. The new money is spent by its first holders, they get to aquire goods and services at todays prices. That is only possible by creating new money. This drives up prices.Those who get it last pay a higher premium on goods and services.
Rothbard wrote: What has government done to our money. A smash hit. Its a good read.
Published: May 8, 2009 10:49 AM
fundamentalist
Current: "Paul Samuelson often said that inflation makes the distribution of wealth more even..."
I see price inflation as making inequality worse. Rich people find it easy to hedge against inflation. Plus, they borrow a lot and get to pay back the loans with depreciated money. Finally, they tend to work in industries that benefit from getting the new money first before prices rise.
The poor tend to work at low paying jobs that don't keep up with inflation. Price inflation is probably the main reason that average wages declined from 1973 to the early 1990's. It seems to me that inflation is a very regressive tax.
Samuelson probably thought that inflation is progressive because he fell for the fallacy that all new money is spread evenly among all people in the economy at the same time.
Published: May 8, 2009 11:18 AM
Manny Mars
LOL..Samuelson must have had his head in the sand. Even distribution of money? Guess that eliminates trickle down economics..I'll take a small win where I can..but sadly he's just trading one ignorance for another. If the middle and poor class even got a whiff of the new money created we'd would have had our version of Germany 1923 long ago. lol a can't say it any better than Dr.Woods. If the printing press could have solved all our problems, it would have done so long ago...
Published: May 8, 2009 11:30 AM
s burgess
i should make it clear i know that money supply has incressed in new zealand m3 ect.but this happened with interest rates of beteen 8 and nearly 10 pc the central bank has been good at keeping inflation below 3 pc .home owners in 2007 were paying 100pc of an avarage wage towards repayments.i presume it was more due to the idea that home prices cant full one friend told me in 2007 that he expected home prices to go up over 40pc in 4 years you can guess my reaction.my idea of what happened has been that although the central bank kept a lid on inflation how much banks were lending was left up to the banks.i will not say that the governments should make limits i dont trust them to do it.but kill the idea that controling inflation cpi is the only problem with our monetary system i blame the system as the hole
Published: May 15, 2009 7:07 AM
Annabelle
Here is a very robust rebuttle of Quiggins article on the Austrian Business Cycle Theory.
http://www.brookesnews.com/091805abcquiggin.html
Published: May 20, 2009 6:02 AM