So, my readers and have been sending me links and information on Austrian Business Cycle theory. Thank you for that.
One question, as I continue through what I have received. The textbook presentation of ABC refers to a lengthening of the production triangle and additional stages of production.
Is this meant to be taken literally? That is, can I go out into the world with a spyglass and ruler recording additional stages of production and then find that these stages will proliferate as interest rates fall?
Or, is this a metaphor for R&D generally?
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Tuesday ~ December 21st, 2010 at 9:28 pm
Greg Ransom
There are 30 miles of mothballed lumber hauling rail cars on an unused rail spur in Northeast Oregon — there are other such stores of these lumber hauling cars across America — and this is but dimension of what are today physically viewable malinvestment goods to be found across the country.
Florida and Nevada and So Cal have many large uncompleted housing or condo projects which can be physically viewed — housing is a long term production good in Hayek’s macro (see his _The Pure Theory of Capital_).
Some of these almost completed structures have been bulldozed — there is video on line of this taking place in the suburbs above Los Angeles.
Tuesday ~ December 21st, 2010 at 9:30 pm
Greg Ransom
Basic marginalist economics familiar to a freshman should make one aware that valuational relations cannot be captured in physical measurements — for classic accounts of the issue read the work of Menger, Wieser, Bohm-Bawerk, Jevons, Mises, Hayek, Robbins, Lachmann, etc. etc.
“can I go out into the world with a spyglass and ruler recording additional stages of production”
Wednesday ~ December 22nd, 2010 at 2:45 pm
Karl Smith
Greg,
Perhaps, I’m reading you wrong but your post seem somewhat hostile. There is no need to be. Murphy and I are quite cordial and I am indeed interested in learning more about what might think of as textbook ABCT.
Just as in mainstream macro lots of people can write lots of papers, sometimes even disagreeing with themselves. At the end of the day, however, that is different from the solid core of observations that we think of as textbook macro.
I take it that this is much of what Roger Garrison is working on. However, I genuinely wasn’t sure how the textbook was meant to be taken.
Wednesday ~ December 22nd, 2010 at 2:12 am
jsalvati
Bill Woosley is required reading on ABCT: http://monetaryfreedom-billwoolsey.blogspot.com/2010/04/austrian-business-cycle-theory-2.html . The ABC theorists (but not the Monetary Equilibrium theorists) generally go astray when they claim things like “the new money doesn’t represent new wealth” and then try to reason from this statement. The statement is true, but financial instruments in general do not “represent new wealth”, financial instruments are an asset to one person and a liability to another person, money is no different. The implicit or explicit obligation of the CB to maintain the value of their currency means that if demand to hold money falls, they will have to lower the money supply with open market operations. That’s the liability part.
Wednesday ~ December 22nd, 2010 at 2:13 am
jsalvati
I should mention that Woosley has a number of other good posts on ABCT with similar names.
Wednesday ~ December 22nd, 2010 at 3:53 am
Ryan M
It’s mostly a metaphor. Hayekian triangles are just a teaching rule, and the Austrian way of thinking about things is that the world is always too complicated to actually go out and measure in the way you described.
Think about it this way: a pencil has value added both as a consumer good and as an input. An increase in the desire to consumer today relative tomorrow decreases loanable funds, driving up interest rates. But whether or not the demand for pencils increases is an empirical question (for which data does not exist) of whether the increase in use of pencils as consumer products will outweigh the use of pencils in the marginal areas of production that are no longer productive due to their length, such as the pencils used in R&D labs or mining.
Where pencils exist on the Hayekian triangle really depends on where they are most valuable as an input relative to their next best alternative. In order to “calculate” that, you would need to know the marginal revenue product of pencils compared to the next best alternative for each area of production in which they are currently employed.
So it’s a metaphor but makes reference to real truths about the economy. At the risk of raising an eyebrow, it’s a metaphor in the same sense that continuous demand and supply curves are ultimately just metaphors.
Time and Money by Roger Garrison, even though it isn’t freely linked to online, is the best source for the explication on this (or if you care about Austrian capital theory, look up Capital and its Structure by Lachmann, which is online). Time and Money’s only real downfall is that it spends too much time just debating neo-Keynesianism and monetarism, when the battle lines were between new classicalism and new Keynsianism at the time it was published.
Wednesday ~ December 22nd, 2010 at 9:40 am
Karl Smith
Ryan:
This is what I have found a bit frustrating. I really have no experience in Neo-Keynesian. I grew up completely within the New Classical – New Keynesian divide, so spending a lot of time telling me that the Keynesian Cross is crap is a bit tedious.
Wednesday ~ December 22nd, 2010 at 3:57 pm
Ryan M
I haven’t read it myself yet, but perhaps Microfoundations and Macroeconomics by Steve Horwitz is a better starting point then? Austrians outright reject the “microfoundations” of new classicals and new keynesians not because they want to return to the macroeconomic methdology before the Lucas Critique, but because they don’t believe people maximize utility in the sense that the mainstream models people today. This isn’t exactly correct, but one way of thinking about it is that people maximize expected utility, but don’t know the distribution of utility (and they live in a crazy, fractal world). The question then becomes, how do people ever coordinate their business plans together in such a way that anything can ever fit and work together? At that point, the heterogeneity of capital becomes more important because much of what entrepreneurs are trying to do is to fit different types of capital together in such a way that fits the behavior of others.
So, when the types of capital produced are incorrect, due to entrepreneurs getting the wrong signals from the interest rate, it causes the need to reshuffle the current allocations of different types of capital. Until those are reshuffled (and some capital even thrown away), the expected marginal product of labor plunges.
Another way of looking at this is to compare Austrian theory to the new Keynesian theories of those who just won the Nobel Memorial Prize. They give “microfoundations” to all those frictions and search costs. But, according to Austrians, those frictions and search costs are everywhere and apply to everything, and decreasing them and better coordinating unemployed labor with unemployed capital is exactly the type of thing that the profit and loss system is for. It’s not a weird, special case where the market doesn’t work perfectly; figuring these things out is one of the primary tasks, if not THE primary task, of the market.
Hope this helped more than Hayekian triangles.
Thursday ~ December 23rd, 2010 at 12:42 am
jsalvati
@Ryan M, it’s worth noting that Horwitz’s book is a Monetary Disequilibrium based book. I happen to think that Monetary Disequilibrium theory is correct, but it does directly contradict ABCT and is generally a lot more compatible with mainstream macroeconomic thought (especially of the Nick Rowe variety).
Thursday ~ December 23rd, 2010 at 4:46 am
Ryan M
I don’t know what you mean by it directly contradicting ABCT. Just because it incorporates aspects of Yeager doesn’t mean it rejects ABCT; look at the last chapter or so of Time and Money for a comparison. Unless you equate ABCT with the Rothbardian view of Money is Gold and Gold is Money, monetary disequilibrium is consistent with it.
Yeager only rejected ABCT, at least by my understanding, because of Austrian capital theory. Professor Smith’s concerns seemed to relate to microfoundations, which Horwitz is strong on.
I haven’t, as I said, read the book itself, but it would be bizarre if the book outright contracted ABCT when he is one of the top five modern Austrian macroeconomists. His public writings are from an Austrian perspective, not just monetary equilibrium.
Perhaps Horwitz drops Austrian capital theory altogether, but in that case no book exists which properly responds to neoclassical microfoundations, except in the most “philosophical” sense.
Thursday ~ December 23rd, 2010 at 3:34 pm
jsalvati
It is statements like this: “When the central bank injects money into the system, this artificially lowers interest rates” (http://mises.org/daily/2673) that Monetary Disequilibrium directly contradicts (the ‘artificially’ part, not the ‘lowers’ part). It sounds like this idea is not strictly necessary for ABCT. Perhaps ABC theorists commonly believe ideas like this, even though it’s not necessary for ABCT.
Thursday ~ December 23rd, 2010 at 3:07 pm
jsalvati
I’m not an ABCT expert, nor on Austrian thinking in general, so I could be wrong, but it’s my impression that Monetary Disequilibrium theory and ABCT are mutually incompatible when it comes to their treatment of money (though not their treatment of capital).
I’ll do a bit of research to clarify my understanding.
Thursday ~ December 23rd, 2010 at 9:58 pm
Ryan M
The Hayekian view is that MV should be stabilized. If V falls, more paper money must be issued in order not for needless re-pricing to take place. All of that is in Prices and Production, the work that won Hayek the Nobel Memorial Prize. Horwitz believes in free banking and that such a process would automatically occur on the market. When we live in the world of the second best and we have a central bank right now, there is less agreement among Austrians over whether it’s best to have the central bank attempt to approximate this or to go back on the gold standard to tie its hands.
The monetary disequilibrium story is consistent with the “getting MV right” story. It’s Mises Institute types who twist history, oversimplify everything that Mises and Hayek said to a strict 100% commodity standard, and claim that anyone who is not affiliated with them (like Horwitz) is not Austrian.
Thursday ~ December 23rd, 2010 at 10:20 pm
jsalvati
OK, that clears things up a bit, and conforms to my intuition, thanks!