pwned!
 

Gary Becker was very careless with his words. Admittedly, he was writing a blog post, not mounting a scholarly critique of Austrian economics. Even so, he rightfully got smacked down.
 

I wanted to thank you for the links to the Roger Garrison PPT. AWESOME! I have never seen the Hayeking triangle presented in such an easily understandable way like that. When it is tied into the PPF it is so much easier to understand.

I have heard Roger Garrison's presentation via podcast. But to see it in the presentation format was, well, exhilarating.
 

Like most of Dr. Murphy's posts, I found this one enlightening and refreshingly free of rhetoric. But like many articles on ABCT, there are a few things that bug me:

Obviously, no honest person can deny that the scraping of bad investments and business plans is costly and timely. After a cluster of malinvestments in housing (which we obviously had), the economy cannot simply do an about-face and go back to its previous level of productivity on the spot. Any notion that stimulating aggregate demand is all that needs to be done to avert a recession should be laughed at, in my opinion.

However, this does not mean that the liquidation of bad business plans is the only cause of the current recession, or that monetary policy is the major cause of the malinvestments (undoubtedly, there were other contributing causes). But I think the first point is the most important, since we are talking about recovery: Might we be able to soften the coming recession, because some of the downturn in productivity is not caused by malinvestments?

Both Austrians and Keynesians have stressed the non-neutrality of money. Keynesians show how sticky prices mean that markets do not adjust to deflation instantly, and Austrians show how economic calculation is distorted by changes in the money supply. Austrians agree with Keynesians that monetary deflation is bad and should be avoided (they disagree on productivity-fueled deflation, but that isn't what we are dealing with here).

If the Fed and the government did nothing, we'd undoubtedly experience monetary deflation (if we aren't already). Free banking theorists seem to believe that under their proposed system, banks would adjust the money supply to meet the demand for money on their own, obviously without government interference. However, we are most certainly not operating under a free-banking environment! Given that we are living in a system where the government effectively owns and designs the banking system, should the government really do nothing? Shouldn't we consider that a better course of action might be for the Fed to try to emulate a free banking environment to the best of its ability?

Put another way, the government owns the post offices in the USA and protects them from competition. We all know the government should not own them, but it does anyway. Given these facts, my orders to post-office employees would not be "do nothing and let the free market deliver the mail", it would be "work to the best of your ability until we can convince congress to allow competition with the USPS".

Austrians seem to assert, perhaps implicitly, that ABCT explains most or all recessions. However I do not believe this to be supported by ABCT itself. Showing that A causes X does not mean that B, C or D cannot also cause X, thus I am skeptical that allowing a huge credit-deflation couldn't also be the cause of a major recession.
 

Thanks guys (first 3 posts).

Grant, you're asking some good questions. I think the panic was caused by Paulson and Bernanke's respond to the real estate crash. I.e. if the government had "done nothing" in September 2007 I think we would have had a severe but quick recession. I think the extreme panic (which is driving the sharp increase in money demand) was caused more by the attempts to prevent the recession.

More generally though, you're right, we can't tell the Fed to do nothing. Given their monopoly, they have to do something, and it's not obvious that literally capping the monetary supply is the right thing.

By the same token, if interest rates were supposed to fall back in Sept. 2007, then maybe "cutting rates" was just following the market down.

There's no objective answer to this. It's like asking how the USSR should have run its state factories (or your Post Office example).