An article over at The Economist comments on the Austrian business-cycle theory.
The article states, “The Austrians may have said smart things about the boom, but what about the bust? One criticism is that the Austrians offered a ‘counsel of despair’, suggesting that the authorities do nothing while a crisis blows itself out.”
The authorities do nothing? According to The Economist, we can’t have that.
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A possible more attractive way of putting it is that the mechanisms which would respond to the crisis in the market have been unfortunately disarmed by government restrictions (for example, monopolized currency). So, ultimately, which is the best way of dealing with a credit contraction? By means of government, which will always suffer from the knowledge and calculation problems, or by means of individuals, who react in their self-interest coordination with others through the price mechanism?
If anybody is interested in a debate on whether or not business cycle related theories of the Keynesian and Austrian schools can be synthesized, your comments are welcomed here: “The Economist on the Austrians.”
I love it (but not really) when Keynesians trot out this argument, like Krugman has lately. Since Austrians recommend inaction during a recession, then that means that they must love long, wheezing periods of difficult and torturous restructuring… right?
This assumption is, of course, wrong. (You would think that such commentators would have at least the sense to realize that Austrians, like virtually any economic school, don’t WANT economic misery.) In a relatively unhampered market, malinvestments and overinflated prices will QUICKLY rework themselves back to a more stable “equilibrium” (so to speak). It is Keynesian pump-priming and deficit spending that actually results in hideous slogs of slow growth, such as the one we are now experiencing or the Great Depression. The accusation is entirely backwards. One need only look as far as the wimpy recession of 1921-23, when Warren Harding (along with the zygotic Fed) quite valiantly sat on his hands and did nothing. In less than two years, unemployment had dramatically shot from its high of 11.7% to a downright incredible 2.4% (in 1923), ushering in nearly a decade of unprecedented prosperity. “Austerity,” my foot.
Christopher,
I think your comment is excellent and would like to re-post it to help explain the ABCT better to others.
Thanks for the compliment! You may feel free to cut and paste this as you please. I should note, though, that I forgot to mention the Japanese “lost decade” (still ongoing, as I understand it) as a third example of a Keynesian slog. Also, “results” should be “result.”
Brilliant comment! It is easy to accuses the Austrians of being very “lax” when economic turmoil begins, however as stated one need only review history and see that less action is indeed more.
It’s a symptom of a larger problem in the way people think.
“Things have always been exactly the way they are now” is a common assumption we tend to make for no reason at all. It leads to a complete resistance to change and the foolish notion that things are permanent.
If the government doesn’t step in and save the banks we’d have had change, and that can’t be allowed. The existing power structure would have undergone radical collapse.
In a very real way we are all terrified of an uncontrolled world where things happen and nothing can stop it, this is i think at the heart of why people have gone along with this for a century or more.
The injustice of inflation, the fascism of our political/economic system, the eternal state of war the USA is in; none of it bothered anyone in this country until the day came when they felt that the pillars holding up the world they imagined as so permanent were crumbling and they couldn’t trust it anymore.
Everything is transient, attempting to arrest in place the existing economic structure caused the Great Depression, and it was a very, very, very small structure to try to arrest compared to today’s global economy.
The plans the rulers have in place can work, the structure can be saved, but only if us peons are willing to endure an eternal depression.
“You know what I’ve noticed? Nobody panics when things go “according to plan.” Even if the plan is horrifying! If, tomorrow, I tell the press that, like, a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it’s all “part of the plan.” ”
-The Joker (from The Dark Knight)
Yes! This is precisely right! I for one am sick and tired of having to explain to people “No, FDR didn’t save capitalism from itself, he saved the corporate elites from capitalism!”
If the authorities would have took the advice to “do nothing” years ago we wouldn’t have the mess we do today.
I suppose this was the inevitable outcome from the years of people abdicating personal responsibility in the misguided belief that the government was somehow responsible for taking care of every person’s every want and need. Very few people today have any clue about the concepts of personal responsibility and self sufficiency and seem to think the government knows best.
Sadly this will not change until the change is forced. When the seemingly limitless unemployment benefits run out folks will take looking for a job seriously. When they find that the government will not bail them out, they’ll start taking responsibility for themselves. The elitist in the government, however, think they know best, so the day of reckoning, is unfortunately still years away.
Spring of 2012 is no longer years away, just 16 months!
…That’s when the second wave of mortgage resets fully settles in.
I agree with The Economist, the authorities should do something!
The should follow The Constitution and restore the gold standard!
But if that is ultimately impractical, then keep the dollar, but follow Originalist Intent: Dissolve the Federal reserve, and base the dollars in circulation directly to the US’s gold reserves, only to be distributed by the US Treasury.
It was a surprisingly Austrian-friendly piece. But I am wondering what others think about White’s characterization of Hayek’s position.
Disagree with the notion that Austrians have promoted a “council of despair”. Really, it is more a “council of laissez faire”. Schiff goes so far as to say that we should WELCOME the recession, as the cure to the malinvestment. Though of course we would have preferred that the artificial boom not occcured in the 1st place.
The Economist could have picked a much better scholarly economist to expound the Austrian position than Lawrence White (Walter Block, Roger Garrison, Peter Klein come immediately to mind). Why is it a good thing that “Hayek was not a liquidationist” ?
The article also, inconveniently, glosses over the fact that under an Austrian system there would be no boom, so there would be no bust; therefore, there would be no “despair.”
“The article also, inconveniently, glosses over the fact that under an Austrian system there would be no boom, so there would be no bust; therefore, there would be no “despair.”
This is simply incorrect. No serious economist, including Austrian economists, would say something this foolish. Three conditions are required in order to eliminate the trade cycle: (1) correct anticipation of future price movements, (2) completely flexible prices, and (3) an invariable supply of money. Conditions (1), (2), and (3) are impossible. Thus, trade cycles are inevitable.
“The Economist could have picked a much better scholarly economist to expound the Austrian position than Lawrence White (Walter Block, Roger Garrison, Peter Klein come immediately to mind).”
Lawrence White is a great economist with a deep understanding of the Austrian theory of cycles. Walter Block and Peter Klein don’t even compare, IMO.
“Why is it a good thing that “Hayek was not a liquidationist” ?”
Because (a) Hayek wasn’t a liquidationist, and (b) allowing the supply of money to contract by 30%+ is a very bad idea, especially during recessions (when the demand for money rises dramatically).
Am I missing something?
Are you not glossing over the difference between going all out to blow up a bubble, and then another bubble to ‘fix’ the popping of the previous bubble, and the free-market approach of Austrians?
Isn’t that difference quite significant?
Paul blows up a building and expects Peter to come up with a plan to repair it before it collapses completely, and Peter’s reluctance to patch it up again rather than demolish it is viewed as a failure of Peter’s ability to deal with Paul’s urge to blow up buildings. You seem to be saying Paul didn’t blow up the building. Buildings just blow up all by themselves.
“Am I missing something?”
Yes. You’re missing a lot. You simply don’t understand the Austrian theory of cycles. Business cycles are not necessarily government-made phenomena, and they will exist in completely free economies.
Maybe someone can correct me but I think you are quite wrong when you said “allowing the supply of money to contract by 30%+ is a very bad idea, especially during recessions (when the demand for money rises dramatically)”.
I don’t think the “demand for money rises dramatically” during a recessions. I think the demand for products is steady but Fed’s lunatic idea of preventing price deflation causes what is in effect a “price control” on goods and services and thereby drying up supply on those goods and services sought by people.
I think the real reason the Fed tries to prevent price deflation is that the “fictitious wealth” generated by the Fed for their banks and well connected comrades would disappear and they can’t have that since the Fed is their agent of choice to steal wealth from productive people.
“I don’t think the “demand for money rises dramatically” during a recessions.”
This is merely an empirical observation with torrential support (like the disutility of labor). In other words, it is not a praxoelogical law. Individuals during times of uncertainty (recessions/depressions) flee towards the safest and most liquid commodity–money.
Did I miss something? I thought the “authorities” have done plenty, intervening more often than a boxing ref who grabs hold of a dominating slugger while the bloody, unconscious opponent is collapsing on the ropes.
…’course, I’m still trying to understand what the hell all that intervening did. What’s called the “economy” is still in the toilet. Years later.
“…the authorities…” Pffft. Says it all , doesn’t it.
It’s true – if you bought a house for $300,000 with no money down and then took out a $100,000 second mortgage and used the money to buy two SUVs and a Caribbean cruise and intended to sell the house in a few years for $500,000 – the Austrians have nothing to offer you and your banker except for a friendly, “Suck it up!”
If the Austrian prescription is despair, then what is the non-Austrian prescription? A fantasy that the government and its cronies in the big banks can create an endless free lunch for the world at the click of a keyboard.
So, when you find yourself in a Keynesian hole, keep digging?
If you find yourself in a Keynesian hole you must not have been digging fast enough…
yeah, and we need bigger shovels
Actually, you just tell yourself, “there is no hole.”
So, who is better off, Germany, who at least took some action recommended by the Austrians (and avoided some actions that the Austrians advised against) , or the US, who headed (and are still headed) 180 degrees in the wrong direction?
I find it comical that everyone finally acknowledges the Austrian explanation of the bust and the years of ignored warning bells, but still think the people who couldn’t see it coming even when it was right on top of them still have all the answers.
Not to mention the irony of acknowledging the explanatory power of ABCT, but then rejecting the ‘cure’ because it forbids loose credit in response to the bust – the very ‘policy’ that caused the boom-bust in the first place.
I consider myself an Austrian but I have to admit that there is something in this criticism. Too many Austrians seem to engage in schadenfreude, finding pleasure in the pain of others.
We should not promote inaction when it comes to the bust phase of the business cycle. There are many things that can be done to minimize the pain associated with the bust. We should be active in promoting changes that remove wedges that hinder traders from trading freely, especially as it relates to taxes and regulations. The lowering of wedges can do much to lessen the pain of the recovery. Often if traders are allowed access to malinvested goods and services they can be redeployed so that they are not wasted.
So do not wallow in schadenfreude.
No one is finding any pleasure in the pain. It’s the proper course of action. The critics claim that the problems can be fixed pain-free. That’s just not possible.
All of this is only academic because we Libertarians have known about Keynesian econ for 70 years and have ordered our personal lives and practices so that we profit from Keynesian disaster. Libertarians don’t get laid off and go under water, do we?
Some do.
Some don’t.
Who’s “we”?
You just don’t get it.
Of course government should do something! They should be working as hard as they can to get the heck out of the economy and stop causing and exacerbating problems with their interventions. Of course, that would mean admitting government’s part in the problem, and that’s too difficult for them to do.
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