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Alternative Business Cycles

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Jargon posted on Wed, Nov 28 2012 9:12 PM

Has anyone here read any Austrian literature which accepts the notion of or even explores non-monetary causes of the business cycle? I think I remember Mises or Hayek talking about cycles initiated by certain weather patterns or solar flares or something. But Mises is very clear: the Austrian business cycle does not seek to explain every crash in the past, it only explains the inevitable consequence of a certain policy.

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The solar theory comes from Jevons.  But are you talking about entire 'business cycles' or about 'crashes'? 

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Jargon replied on Wed, Nov 28 2012 10:01 PM

I take it you are differentiating businesses cycles from crashes thusly: business cycles start a process which inevitably results in a downturn, whereas a crash can just be the precipitating event which ends a business cycle or causes a downturn generally?

I mean business cycle.

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There are "natural" crashes like the Christmas crash.

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Neodoxy replied on Wed, Nov 28 2012 10:21 PM

Rothbard is explicit in his reasoning that what marks the business cylce is the lack of any real cause. If it has a real cause then there's really no need to have a separate "theory" of it in terms of why it would occur in the first place. That is already implied in the rest of economic theory. I might as well bring out a pet theory of mine which is that I'm starting to wonder whether or not ABCT, as it currently stands, just describes a case of the business cycle (talking about "unreal" cases here) and whether or not there aren't other ways that the business cycle could occur with Austrian Theory. For instance I think that the current crisis is much more a case of massive moral hazard than traditional ABCT.

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Jargon replied on Wed, Nov 28 2012 10:38 PM

Rothbard is explicit in his reasoning that what marks the business cylce is the lack of any real cause.

I might be misunderstanding, but I find this impossible to believe. I haven't read MES but this is irreconcileable with the Misesian position on the business cycle.

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Neodoxy replied on Wed, Nov 28 2012 11:03 PM

I mean that the business cycle is ultimately caused from the money side which then passes on to the goods side, not the other way around.

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Jargon replied on Wed, Nov 28 2012 11:12 PM

Ok yep I was :P. Can you link the exposition thereon?

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Neodoxy replied on Wed, Nov 28 2012 11:52 PM

Ugh, I can't remember exactly where it is. It's somewhere in MES and as I recall there's another mention of it in America's Great Depression. It's straightforward though. If there's a war where a great deal of materials are destroyed, or if there's a great crop blight, or some other obvious reason that AS would decrease, then of course business will recede, output will fall, and unemployment will result. The very reason why we need a theory of what causes a business cycle is that there's nothing like this to point to. It's like great destruction has been wrought out of nowhere. This is what has marked mainstream business cycle theory since Marx: an explanation of why crisis occurs in the absence of any "real" deficiencies or problems in the system itself (unless your talking about RBCT but I don't know much about them)

Something I find very interesting which Rothbard does say in MES which is very revealing about the nature of ABCT is that a sudden shortening of time preferences would cause a crash in business. This is extremely relevant because this would have the brunt  of the same effect as ABCT

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Zlatko replied on Thu, Nov 29 2012 4:33 AM

Neodoxy:
Something I find very interesting which Rothbard does say in MES which is very revealing about the nature of ABCT is that a sudden shortening of time preferences would cause a crash in business. This is extremely relevant because this would have the brunt  of the same effect as ABCT

 
Across the board? Wouldn't a sudden shortening of time preferences just cause reallocation of resources from the earlier stages of production to the later ones, preventing a "crash" at least in the later stages?
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For instance I think that the current crisis is much more a case of massive moral hazard than traditional ABCT.

It is due to a mixture of causes, including credit expansion. Credit expansion provided the fuel for it, but there were a lot of regulatory developments outside of monetary policy that aggravated the crisis and caused the banks to act with wanton recklessness.

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Neodoxy,

If you're interested in brief treatments why the recent financial crisis can't really be attributed to moral hazard, I'd like to point you towards two relatively short posts of mine on the subject: "2007–09 Under an Austrian Lens" and "Freddie and the Crisis." The latter is probably the most relevant, as it deals with the supposed role of GSEs in instigating the crisis.

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"Across the board? Wouldn't a sudden shortening of time preferences just cause reallocation of resources from the earlier stages of production to the later ones, preventing a "crash" at least in the later stages?"
 
I mean when people begin demanding current goods in greater quantities and the interest rate rises. Ultimately ABCT occurs exactly because this happens suddenly. If credit expansion made for a stable decrease in the money supply then ABCT would not happen because it would be just like a natural decrease in the money supply. What happens is that the production structure lengthens, but then once the bust hits and interest rates rise the current production structure is unsustainable. This means that capital good/longer term production industries can't finish the projects which they are currently working on, the entire structure of production needs to change to a point where it is ultimately producing less. This means that unemployment results, payrolls decrease and bust occurs. Blah blah blah.
This doesn't happen if people generally value goods more in the future because then they save/invest more leading to lower interest rates and it's not that current short term processes become unprofitable, quite the opposite they become comparatively more profitable since the minimum amount of money you're paying to fund the process (the interest rate) goes down, and so you'd be willing to pay more for the machine overall. It's not then that this becomes unprofitable per se, but rather that other longer term projects become more profitable and they bid out all of the resources right out from under you... Literally in the case of land :P Thusly in this case resources have a more readily available and more highly valued use which they can be used in, and therefore there's no problem, no collapse, no unemployment. When the interest rate suddenly increases drastically these places only have less valued areas to go and they can only go there after their price decreases.
I'm very happy. This is possibly the strongest case I've ever put forward in terms of ABCT
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