The Austrian Business Cycle Debunked
More on why I am not an Austrian. Austrian Economics is not consistent with Objectivism and it is not correct formulation of Economics Science.
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Previous comments... You are currently on page 2.
The 2001 recession was caused by the Fed, but not because they printed too much money. The 2008 recession was not caused by the Fed, it had many causes of which poor lending practices was one, but hardly the only one.
My goal is not to build a coalition or politics, like you and Keith Werner. My goal is to get people to think. We have had years of pundits in the US pushing pro “free market” positions, but like Rand said Capitalisms defenders are often its worst enemies, including the Austrians.
Amen, we can be all friends again now.
(original quote used 'laid', not 'placed,' but....)
Herb, I'd say you're more of a 'normal today consumer.' In our childhood, many of us loved to understand How and Why things worked.
There was a time when I could describe pretty much How and Why EVERY part of an automobile, from bumper to bumper and ALL systems and components, worked, and why (except maybe torque converters...).
Today, I describe my personal car, my Prius, as a Computer on Wheels. There is NO physical connection between the gas pedal and the engine. The gas pedal has a magnetic sensor (Hall Effect chip) that senses the position of the pedal and sends a signal to a computer where algorithms compare tons of things about the car in order to decide whether to use the engine, battery or some combination, as well as how much throttle opening to set (if any) and how much fuel to inject.
With no physical cable or lever between your foot and the power plant in the front of the car.
But without all that gingerbread, the Automobile System I drive could not meet fuel economy and pollution standards demanded today (by the government, actually.)
Think about the early autos. They were Dead Simple... totally NOT 'complex,' per se. You had to start them by hand with a crank. Much simpler than all the ancillary stuff a 'starter motor' adds to the car, but the starter motor saved a lot of broken wrists and consumers preferred that.
Please differentiate between 'simple' and 'easy.'
Today's cars are Far From Simple, but Way Easy for everyone.
:) And I still miss my old Corvette, even with all of its problems and shortcomings.
Quantitative easing translates to investment (Mal-investment to be sure :)
If the FED was not able to print money (based on buying treasuries) and interest rates were market based THEN savings would correlate with investment.
Technology and increases in production due to technology is the only source of growth. The constant theft of the government (which appears as price inflation but is really the Deflation of the value of the currency hence prices must adjust upwards) is hidden by the deflation of prices due to technology. That's the only reason the government can get away with it and not kill the economy.
In the end everyone could have been 100 times richer, and the economy much larger, if the government didn't take it all.
On the face of it, Austrian Economic makes sense from the point of view of multiple incentives inspiring action. There's something missing from that because those incentives don't always work.
I would add this to either theory, attitude and motivation. I think it doesn't matter much which theory you subscribe to, if the attitude of the masses is fear based, there will be little expansion. On the other hand when the measurement of confidence is high, millions of people decide to do things they have been putting off until better times. A good portion of the things put off are big ticket items like cars, houses, RVs, cruises, etc. This change in attitude puts a forward bias on the economy no matter what theory or metric we use to measure it.
I have noticed in the last few months the news people have been publicizing the consumer confidence stats. They are up from the last 5 years, slightly. My theory, the Ronc grow your own gulch theory, says that when confidence is down is a good time to expand as there is little competition. Then when confidence is renewed it is a good time to sell these opportunities to those who now have the ability and willingness to buy. That is very mercenary, but that's how it works in my micro. Buy low, Sell high. My personal economy grows this way, and I submit that if multiply that by 3 or 4 billion there will be ups and downs based on the experiences and confidence of the masses.
1) You state that "savers" have alternate means of saving, such as investing in stocks and corporate bonds. The Austrian School says that savings provide the stored capital to invest. Those alternatives just provide a different route to that investment. Stocks either do so by providing money directly to a company (if the shares are via an IPO or from the store that the company retains and sells on the open market), or indirectly via sales that garner revenue for another party that are then put into banked savings, more stock purchases (which then starts the cycle again), bonds, or consumption. Bonds on the other hand are direct investment, as they are sold by companies to fund operations and improvements/expansion. Thus, even those alternate mechanisms for "saving" really lead to investment, which is the premise of the Austrian School's evaluation of the business cycle.
2) If you truly think that stock price is dependent on company performance, then you are more ignorant of the stock market than I thought.
3) You state that Austrians aren't concerned with interest rates that are "too high." That is not true. It is merely that that occurs less frequently than them being too low. Nor are central banks (the Fed) likely to retain high interest rates, but they often set them and maintain them too low. Too low of interest rates encourage mal-investment by encouraging money into activities that otherwise wouldn't be funded as too risky. But, since the rates are so low, the bankers are looking for anything that will give them a chance at a better return. They take a chance knowing that the money that they are lending is garnering them no return sitting idle, so any opportunity to improve that outcome is pursued. Higher interest rates discourage loan seekers for less risky investments, as they have increased costs and their level of return must be higher to make a viable financial proposal.
4) You cite that central banks are relatively new phenomenon. That in itself is true. But the control of currency has been the case since currency has existed, in any form it has existed. When that control has been centralized, via a government usually, it is subject to manipulation, and it is the manipulation that is the issue, not specifically who does the manipulation. As far back as the Romans (and further) coinage was manipulated so as to inflate the value. Other lower cost alloys were used so as to debase the value of the metal (our current coinage has undergone the same debasement), as has shrinking the size of the coinage so as to reduce the amount of precious metal included in the coin. All of these things cause inflation of the currency, whether it is caused by a central bank or not is irrelevant.
5) Inflation and recession are also functions of government spending, particularly during wars when governments often expand the money supply to fund the war. This spending causes a distortion in the economy similar to the mal-investment of low interest rates. Businesses that otherwise would not receive funding do, despite the risks. While this is not specifically called out by the Austrian Business Cycle, it is in the same vein of causal effect.
These are just 5 glaring issues in your analysis. I don't have time to continue on, but anyone reading your essay should place these comments in context and evaluate the Austrian School and the Business Cycle appropriately.
You continue to demean the Austrians because, in my evaluation, some Austrians do not support your view of Intellectual Property rights. You skew their principles based on this view, and present a jaded perspective.
Great article- thanks