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Criticism on the ABCT

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BasV Posted: Thu, Feb 16 2012 11:49 AM

I have read some criticism on the Austrian Business Cycle Theory from Bryan Caplan (and John Quiggin). You can read his entire paper here: http://econfaculty.gmu.edu/bcaplan/whyaust.htm. But I will sum up some of his points, which I cannot figure out my self (I have no counterargument).

 

- Crisis appeared in the 19th century as well (and I know they all started with credit expansion), but my question is, how is it possible that the contraction phase lasted one to five years in the 19th century (generally) where the recessions of the 20th century (despite the Great Depression) generally lasted less than a year?

- How is it possibble businessmen (with all their capacities) do not see interest rates are ARTIFICIALLY lowered? Wouldn't it be far more logical that businessmen (which are naturally selected) react, after an artificially lowered interest rate, like this:

A) Make investments which will be profitable even though interest rates will later rise
B) Refrain from making investments which would be profitable only on the assumption that interest rates will not later rise
 

- The bust phase occurs because of a re-allocation in resources from the capital goods industry to the consumtion goods industry. The logic result will be that during the bust phase a boom occures within the consumption good industry? (which does not because data shows that during the boom phase production and employment rises in almost all sectors, and declines during the bust phase)

- Austrians reject mathematics and econometrics, and I agreed with some of their arguments, but (for example) price theory shows us that a minimum wage will increase unemployment. However, economic theory tells us nothing about how big the in crease in unemployment will be. So, econometrics and mathematics can help to learn which relevant factors actually matters (because, after all, there are more factors which increase unemployment).

Sincerely, 

Bas
 

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1. How does he define recessions? Lower prices? If yes, that's his mistake right there.

2. Because businessmen and Austrian economists are not the same creatures.

3. No. The resources are not re-allocated to the consumption goods industry. They have been malinvested, a polite way of saying flushed down the toilet. They cannot be re-allocated anywhere.

4. Can you please tell me a specific formula that actually works? 

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Clayton replied on Thu, Feb 16 2012 1:52 PM

Austrians reject mathematics and econometrics,

This isn't quite true. Austrians reject the use of mathematics in unsuitable ways. The misapplication of statistics and probability theory is the most common sort of abuse of mathematics in the social sciences, including economics. If you think about it, Austrian economics is more like mathematics than physics in that it restricts itself to the use of deductive methods only.

The root problem with the use of mathematics in mainstream theory is that it obfuscates the use of incorrect inductive reasoning. You cannot derive causal relations in complex systems (such as human brains, human economies, or even fruit flies) from observation of statistical correlations. You cannot quantify subjective states.

and I agreed with some of their arguments, but (for example) price theory shows us that a minimum wage will increase unemployment. However, economic theory tells us nothing about how big the in crease in unemployment will be. So, econometrics and mathematics can help to learn which relevant factors actually matters (because, after all, there are more factors which increase unemployment).

I disagree with the common view that Minimum Wage is not an important problem. It is an important problem and it contributes to many of the social ills facing society today. Abolition of the MW would make almost everyone wealthier except for the few bottom-rung employees who are only marginally employable at the MW and would likely be laid off with the abolition of MW laws.

Econometrics cannot even tell us "how big" a problem is. It's like trying to use partial differential equations to figure out "how long" is a particular strand of yarn going through a giant yarn ball. There is just too much complexity and too many interactions and too much ineradicable dependency between variables to be able to determine how much contribution an isolated variable makes.

Clayton -

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Wheylous replied on Thu, Feb 16 2012 5:13 PM

You cannot derive causal relations in complex systems (such as human brains

Haha. My research project right now is focused on using statistics on steroids to try to get a computer to learn human language :P

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