ABCT seems so obvious to me that I don't understand why it hasn't become mainstream. What arguments would mainstream economists use to refute it?
What Went Wrong with Economics
mickanomics:FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm.
Because Friedman didn't properly understand Capital Theory, which is why he made serious errors in how he tried to evaluate its validity.
Both Jesus Huerta de Soto in " Money, Banking, and Credit Cycles", and Roger Garrison, in "Time and Money", address these errors and show that on the contrary, Friedman's data is consistent with Austrian Business Cycle theory.
here is the relevant footnote with respect to Roger Garrison's response to Milton Friedman:
103. In an article in which he examines data from the crises between 1961
and 1987, Milton Friedman states that he sees no correlation between
the amount of expansion and the subsequent contraction and concludes
that these results “would cast grave doubt on those theories that see as
the source of a deep depression the excesses of the prior expansion (the
Mises cycle theory is a clear example).” See Milton Friedman, “The
‘Plucking Model’ of Business Fluctuations Revisited,” Economic Inquiry
31 (April 1993): 171–77 (the above excerpt appears on p. 172). Nevertheless
Friedman’s interpretation of the facts and their relationship to
the Austrian theory is incorrect for the following reasons: (a) As an
indicator of the cycle’s evolution, Friedman uses GDP magnitudes,
which as we know conceal nearly half of the total gross national output,
which includes the value of intermediate products and is the measure
which most varies throughout the cycle; (b) The Austrian theory of the
cycle establishes a correlation between credit expansion, microeconomic
malinvestment and recession, not between economic expansion
and recession, both of which are measured by an aggregate (GDP) that
conceals what is really happening; (c) Friedman considers a very brief
time period (1961–1987), during which any sign of recession was met
with energetic expansionary policies which made subsequent recessions
short, except in the two cases mentioned in the text (the crisis of the late
seventies and early nineties), in which the economy entered the trap of
stagflation. Thanks to Mark Skousen for supplying his interesting private
correspondence with Milton Friedman on this topic. See also the demonstration
of the perfect compatibility between Friedman’s aggregate data
and the Austrian theory of business cycles, in Garrison, Time and Money,
pp. 222–35.
If you want the economist view of the ABCT then look up Krugman and hangover on the web. He wrote a short article about the ABCT. A better but less detailed description of the theories of Keynes is in the rap video staring Keynes and Hayek that can easily be found in the blog on this website.
As for your the answer to the question in the topic section, I find that easy to answer:
The philosophy of Keynes provides the best theoretical cover against all other economic theories for politicians and central planners to go about their business of destroying society. Prior to the "General Theory of ...", the politicians and central planners had a whole lot more explaining to do when attempting to stimulate business, divert resources to favorite people, steal, devalue the currency, etc.
People don't like being told the truth, especially when it hurts. Have you ever tried telling a mother her son is a hopeless junkie or an old friend her husband is trying to bed every woman he meets? They won't believe you, even if deep down they know the truth.
That's the same with economics. Everybody knows Keynesian economics are a lie but the charade must be kept on forever. That's why now we have a jobless "recovery" and consumers prices are skyrocketing despite "inflation at an all time low". Nobody wants to hear the truth, better to drag the scam on as long as possible. Perhaps we'll be able to pass it on to our children and grandchildren.
Bogart:If you want the economist view of the ABCT then look up Krugman and hangover on the web.
i.e. this I presume.
Thanks,
mickanomics: ABCT seems so obvious to me that I don't understand why it hasn't become mainstream. What arguments would mainstream economists use to refute it?
They lack a capital theory. So, essentially, they lack the tools to understand it. It's actually easier to explain it to a layperson.
mickanomics:i.e. this I presume.
Having read the article it seems there is a conflation of two issues.
1. Austrian business cycle theory as an explanation of what is observed.
2. The "Austrian" recommendations of things to do (or not do) after a "bust".
It seems that the article is complaining about 2. But there is not much sign of arguing against 1.
... and in my original question, I am really searching for arguments against 1.
EDIT: maybe should add that I am a supporter of 1. But not necessarily in full agreement with all of 2.
mickanomics:EDIT: maybe should add that I am a supporter of 1. But not necessarily in full agreement with all of 2.
Learn capital theory or be condemn to Keynesian fallacies for the rest of your life.
DD5: The lack a capital theory. So, essentially, they lack the tools to understand it. It's actually easier to explain it to a layperson.
The lack a capital theory. So, essentially, they lack the tools to understand it. It's actually easier to explain it to a layperson.
Apart from differences in capital theory, George Reisman explains why economics took such a path after the advent of Alfred Marshall in the introduction of Capitalism.
Because economics is hard work (from subjective/marginal utility theory all the way down to capital theory/entrepreneurship), and if you don't know the whole framework the ABCT won't make much sense, making it easier to appeal to "irrationality", "speculative activities", "excessive" risk taking &c.
Freedom of markets is positively correlated with the degree of evolution in any society...
I just found an excerpt form an intervew with friedman here: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html
EPSTEIN You were acquainted with the Austrian economist Friedrich Hayek and also are familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. When you were talking about bad investments, you were alluding to Austrian business-cycle theory. A certain concept that has pretty much gone into our parlance and understanding fits in with what you said about what happened in Asia. There can be times and conditions in which the stage can be set for malinvestment that leads to recession. FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.
EPSTEIN You were acquainted with the Austrian economist Friedrich Hayek and also are familiar with the work of Ludwig von Mises and his American disciple, Murray Rothbard. When you were talking about bad investments, you were alluding to Austrian business-cycle theory. A certain concept that has pretty much gone into our parlance and understanding fits in with what you said about what happened in Asia. There can be times and conditions in which the stage can be set for malinvestment that leads to recession.
FRIEDMAN That is a very general statement that has very little content. I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.
Again this is more about criticizing the Austrian recipe for what to do, it is not really criticizing the theory as an explanation of what is observed. I am beginning to suspect that perhaps ABCT is already a mainstream idea, and perhaps mainstream economists only differ from the Austrians in their solutions to the problem.
Because it doesn't tell people what they want to hear.
The fallacies of intellectual communism, a compilation - On the nature of power
mickanomics: I just found an excerpt form an intervew with friedman here: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html
There is a paper that talks about the subject, by Lawrence H. White: Did Hayek and Robbins Deepen the Depression? In Monetary Theory and the Trade Cycle, Hayek makes reference to the fact that the Federal Reserve did not allow liquidation of malinvestment, and this view was later reinforced by Rothbard (although, as I understand it there is a possibility that some of his figures are wrong, or poorly constructed). So, I'm not sure Friedman's (and later DeLong's) opinion is justified.
slavery took place....but wasnt necesssarily mainstream.
main stream is a little ambiguous. maybe the austrians as you call them are wrong.
I thought that ABCT states that an increasing money supply inflates asset prices - which stimulates more people to jump on the rising-asset price investment bandwagon, borrowing to invest, which creates more money in a feedback loop. Can anyone find any mainstream economist that has written anything disputing this phenomenon? (nothing mentioned so far disputes it).
Or maybe they're not.