Tuesday, May 12, 2009


Garrison Rejoinder to DeLong

Here Roger Garrison responds to DeLong's critique of Garrison's Freeman article. I think Garrison makes some good points, and he certainly provides the larger context within which to contrast the Austrian versus Keynesian approach to business cycles. However, I don't know if Garrison made the right move here:
DeLong writes that “Garrison and the other Austrians have a very basic problem with their math.” But with his own math, DeLong demonstrates only that the housing bubble was not Mt. Vesuvius. Implicitly, though, he is suggesting that something else was—that there must be some other candidate cause whose magnitude matches the severity of the recession.

My article did not contain any problematic math; it contained no math at all—because the Austrians recognize that the relationship between cause and effect is not a quantitative relationship. Both Mt. Vesuvius and the smoker’s carelessness count as causes. So, too, do the cheap credit and consequent temporal discoordination that preceded the downturn.

So yes, it's funny that DeLong is accusing Garrison of botching his math, when (as Garrison notes) he didn't use any math at all. Garrison is responding that a smoker can start a forest fire, and it would be silly for an investigator to say, "That can't be the explanation; look at how much damage the fire did! Someone must have planted a lot of dynamite."

But I think this concedes the basic soundness of DeLong's calculation, where he takes the $2 trillion in real estate losses and then wonders how that could translate into $x trillion (I forget what his number is) in worldwide losses in the financial system.

Is it too simplistic for me to say, "Leverage"? I grant that as an Austrian talking about physical distortions in the capital structure, I would have to translate what that would mean in the Austrian account. But isn't that what the answer to DeLong is, in one word?

One would surmise that leverage is indeed the answer. To be fair, however, I haven't read Mr. DeLong's argument. On the other hand, if his argument fails to account for leverage, this would seem a deal-breaking omission.
What's really significant here, however, is that DeLong acknowledges the Austrian Cycle Theory is PART of the story!
Yes, the answer is leverage.

See this article by Steve Hanke on the "Credit Triangle"

And note well. The significance of leverage is assumed right at the very beginnings of "Austrian" business cycle theory.

The liars and dimwits who don't know that first thing about ABCT theory invent a bogus stawman "ABCT theory" in order to trash it -- leaving out almost every functioning part of the construction.

And yes, when I say liars and dimwits, I'm talking about Krugman and DeLong and the rest of the ethically challenged Democrat party economists who lack even a basic understanding of the history of economic thought.
Seems to me Mr. DeLong's argument is that the Austrian theory accounts only for the malinvestment in real estate, and thus EXCLUSIVELY the unemployment associated with the bursting of the real estate bubble.

I'm either reading Mr. DeLong's argument wrong, or Mr. DeLong has no idea that ABCT accounts for ALL malinvestment in the capital structure, not simply that found in "construction", as he calls it.
There's a lengthy quote from Little, Wilson and Moore's Applied Logic which is relevant. I'll post it if you want...I'd go so far as to say that in reading it, J. Bradford DeLong's name jumps into view fifty years ahead of time.
Brian N. writes, "I'd go so far as to say that in reading it, J. Bradford DeLong's name jumps into view fifty years ahead of time."

Do you mean in a good way, or a bad way?
Sean, I mean that in the worst way possible; Brad DeLong's behavior is a Soviet parade of red flags that he's not to be taken seriously. In a way, he reminds me of Michael Moore; if one is not already familiar with the intellectual and philosophical diseases of the modern left, one might think it an act, a caricature used purely for entertainment purposes. The real horror begins when you realize not only are they deadly serious, they're actually playing somewhat nice, for now. I can easily see DeLong sneering off the Austrian school in an elaborately cherry-picked tome, the ultimate reward for which will be nine grams from his loving masters.
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