Monday, May 25, 2009


Correcting Quiggan on Austrian Business Cycle Theory

In today's Mises Daily I defend Austria from the Australian. An excerpt:
I am not here to tell you the Mises-Hayek theory of the business cycle is a work of art that has no flaws. If I said that, then I would be living up to Quiggin's caricature. What I will say is that the Austrian explanation of the boom-bust cycle makes more sense than any other explanation I've seen. In particular, most rival schools of thought say that the way to fix an economy plagued by overconsumption and reckless lending is to have the government borrow obscene amounts of money and to have politicians take over financial accounting. And it's the Austrians who allegedly cling to dogma in the face of overwhelming counterevidence?

UPDATE: Quiggan responds on the Mises blog; I give a half-serious answer.

Nice rebuttal, Robert, but a quick question about capital theory:

As I understand it, ABCT says that during a boom, consumption goes up, investment goes up, but replenishment of capital goods (manufacturing equipment, etc., right?) goes down. I've read your sushi story as well, in which case the islanders under Krugman's direction divert boat and net maintenance personnel to other tasks to reap a temporary increase in capacity.

But say it's now a boom and I am a business owner who has capital (say, machinery) that needs repair or replacement. Why wouldn't I just upgrade the machinery, or at least spend the money to have it properly maintained, given that money is flowing freely?
Also, to the "ossified dogma" objection to ABCT, it can be argued - it is true - that Austrians' main reason given for the business cycle is government intervention, and that part of it has indeed not fundamentally changed for many decades. But that is only because it is correct!

A member of the Flat Earth Society could just as easily claim that those who assert that the earth is round are following an "ossified dogma," whereas flat-earthers have gone on to develop a vast body of theory about the properties of a flat earth. Naturally in spite of all evidence to the contrary.

The only reason flat-earthers died out and Keynesians haven't is that people in power have a big stake in the general public's (and academia's) economic beliefs, and they need certain lies to be perpetuated to gain more power.

Finally, your answer to Quiggin's gem of an argument about how the business cycles from 1945 to the 1990s were not as bad as those in the 19th century was great. I would just like to add that the parenthetical comment following the part you italicized:

"...(how much worse is a matter of some controversy, but no serious economist claims it was better)."

is a clever misdirection. In other words, he's using the stage magician's trick of directing the reader to the question of which set of business cycles was more severe, when the real action is in how he cherry-picked the time periods. That critics of ABCT have to resort to this level of linguistic smoke and mirrors is telling.
I did some research and now see the where I misinterpreted you. It's not that I as a business owner would let my capital goods wear down, but that the overall supply of capital goods in the economy would be depleted. So if I wanted, say, steel to manufacture tractors, it might have become more scarce (because of overuse during the boom years) so as to be prohibitively expensive. Correct?
Bob, nice response; I look forward to hearing what Quiggins says next - he might change his mind somewhat.

Don`t look now, but I`m working on him too; he was one of the other p*ssy commenters on my post about ignored middle ground on power regulation:
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