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 The Austrian theory of the business cycle has been “superseded,” our expert tells us.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.
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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.
“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).
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.
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.
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.
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.
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.
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…
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
Here is a very robust rebuttle of Quiggins article on the Austrian Business Cycle Theory.
http://www.brookesnews.com/091805abcquiggin.html
You could definitely see your enthusiasm within the work you write. The world hopes for more passionate writers like you who aren’t afraid to mention how they believe. At all times follow your heart.
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