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.
Esuric: Because the ABCT condemns government interventionism.
Because the ABCT condemns government interventionism.
There are quite a few economists who condemn intervention, or at least favour something approaching laissez-faire, who aren't Austrians. David Friedman and Bryan Caplan are market anarchists who think the Austrians are wrong on business cycles. There are probably quite a few others (I think some ex-Austrians, like Dan Klein, Alex Tabarrok - "Masonomics") who oppose interventions think free banking would be better - I suspect this would apply to many public choice economists ("public choice" is not really a school, but in comparison to Austrian economics, it is bigger and closer to being considered serious economics if you look at rankings of journals and departments, or if you were to talk to leaders of the profession). Finally there is the broader Chicago and new classical macro group. Obviously not monetarists like Milton Friedman, but I'm not sure if there's anything in new classical macro which supports the view that any intervention is beneficial. I'm not sure if Barro, Lucas, Tom Sargent, Prescott, Kydland etc. have had jobs at the Fed or done anything to suggest this is what they were fishing for. So we should note that condemnation of government intervention does not appear to be the only reason for the rejection of ABCT.
Another significant factor is that Austrian theory does not led itself to formal modelling. This could be because economists believe that doing work on ABCT is too risky if one intends to have a good career in economics. Or it could be because they find Austrian theory is flawed. I would suggest the latter applies to the likes of D Friedman, Caplan and Tullock. But it probably applies to most of them to some extent. Probably the most important factor which is left out of mainstream macro is capital theory, which is of course an important element of ABCT. But aside from that, how close are new classical macroeconomists to sharing the Austrian perspective on the present crisis? I suspect there is a good deal of agreement. It's been a while since I studied these things though, so it would be interesting if any of you who are taking a freshwater macro course could comment. I think freshwater macro is, as it has been for several decades, the future of the mainstream. Even saltwater macro has little relation to Keynes' economics. I agree with Peter Klein that Keynesian economics is the beast that won't die, but this is in the mass media and politics, not so much in academia. Bear this in mind if you wish to debate with serious economists.
Austro-Devil:There are quite a few economists who condemn intervention, or at least favour something approaching laissez-faire, who aren't Austrians. David Friedman and Bryan Caplan are market anarchists who think the Austrians are wrong on business cycles. There are probably quite a few others (I think some ex-Austrians, like Dan Klein, Alex Tabarrok - "Masonomics") who oppose interventions think free banking would be better - I suspect this would apply to many public choice economists ("public choice" is not really a school, but in comparison to Austrian economics, it is bigger and closer to being considered serious economics if you look at rankings of journals and departments, or if you were to talk to leaders of the profession). Finally there is the broader Chicago and new classical macro group. Obviously not monetarists like Milton Friedman, but I'm not sure if there's anything in new classical macro which supports the view that any intervention is beneficial. I'm not sure if Barro, Lucas, Tom Sargent, Prescott, Kydland etc. have had jobs at the Fed or done anything to suggest this is what they were fishing for. So we should note that condemnation of government intervention does not appear to be the only reason for the rejection of ABCT.
The point is that the Austrian framework, and all of its implications, a priori condemns all government interference. It logically destroys every single form of planning and interventionism--there is no way to get around it. Now, there are Neo Classical economists who also oppose such interventions, but their framework is logically unsound. Mainstream Neo-classicism (neo-walrasian and new-Keynesian) can be used to both condemn and justify anything, which is why both Caplan and Stiglitz/Krugman are considered "neo-classical" economists. Either way, most of the "free market" neo-classical economists don't really oppose market interventionism at all. They still support monetary central planning, some sort of welfare, and in many cases even protectionism. The difference between them and their "left-leaning" counter-parts is one of degree, and not kind.
This means that, if Austrian economics ever became completely mainstream, their would be a vast contraction in the amount of economists. The government and special interest groups support and employ thousands upon thousands of economists who are paid to justify some form of privilege. The answer to this question is obvious if one remains honest:
Another thing to remember is that the average person, who knows nothing about economics, believes that someone/something "must do something." As far as Caplan is concerned, the man is absolutely clueless when it comes to Austrian economics. I once heard him say that if the rate of interest was too low, that market actors would realize this, take it into account, and adjust their calculation. I mean, only someone who's never heard of the Wicksellian framework could ever say such a thing. The point is that the interest rate is low if and only if it is below the natural rate. This means that a 15% market rate of interest may be too low, and that a 3% market rate of interest may be too high. There is no way to engage in economic calculation when you have no accurate information signal.
Austro-Devil:Another significant factor is that Austrian theory does not led itself to formal modelling.
Their positivist methodology, and the various concepts they stole from quantum mechanics, has no place in economics. Formal modeling is entirely inappropriate when it comes to human action. They continuously chase chimeras, while Austrians actually investigate real economic phenomena. There are those who see through their logical fallacies, and because they've never heard of von Mises, or Bohm-Bawerk, they turn to Marx.
Austro-Devil:Probably the most important factor which is left out of mainstream macro is capital theory, which is of course an important element of ABCT.
Bingo. They have no capital theory. They have their meaningless production functions where capital is a homogeneous perfectly supplementary blob.
Austro-Devil:I think freshwater macro is, as it has been for several decades, the future of the mainstream. Even saltwater macro has little relation to Keynes' economics. I agree with Peter Klein that Keynesian economics is the beast that won't die, but this is in the mass media and politics, not so much in academia. Bear this in mind if you wish to debate with serious economists.
The synthesis took a bunch of confused economists, gave them a lot of money, and told them to go play with toys and cute models (DSGE). But they would only keep this money if they produced results which could be acted upon.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I think it's because there are obvious political implications to different theories of business cycles. The austrian theory is less appealing politically.
Why is sobriety not the chosen path of an alcoholic: He believes he is gaining from his destructive behavior. His pursued end is the feeling of drunken disconnect from reality.
awake: Why is sobriety not the chosen path of an alcoholic: He believes he is gaining from his destructive behavior. His pursued end is the feeling of drunken disconnect from reality.
Well, wouldn't you say he's gaining in the short term?
DD5: mickanomics: DD5:And by the way, the theory in issue 1 is not the Austrian theory Really? I thought it was. If I'm mistaken, then my apologies... can you clarify... ABCT is not a theory of intratemporal distortions but of intertermporal distortions.
mickanomics: DD5:And by the way, the theory in issue 1 is not the Austrian theory Really? I thought it was. If I'm mistaken, then my apologies... can you clarify...
DD5:And by the way, the theory in issue 1 is not the Austrian theory
Really? I thought it was. If I'm mistaken, then my apologies... can you clarify...
ABCT is not a theory of intratemporal distortions but of intertermporal distortions.
I have no idea what you are saying.
mickanomics:I have no idea what you are saying.
We know.
Esuric, I agree with you. I'm basically saying that (1) I think we can win the war against mainstream macro, but we have to actually engage with them. There is still a disproportionate amount of focus on Keynes. (2) Politics has undoubtedly perverted economics, but may not be quite so important as some believe.
Also I'd like to suggest there is an important distinction between being correct and selecting some correct arguments to persuade someone. It is probably true that much of macroeconomics exists in its current form because of the existence of extensive government intervention. However, few economists will take seriously anyone who raises this. So if you are simply maintaining the truth of this point on the messageboard, but will focus on capital theory and subjectivism in debates and writing, that is wholly positive. Otherwise the best we can probably hope for is a Pyrrhic victory.
In other words, lets stop asking why isn't ABCT more generally accepted and instead focus on what can be done to make it more generally accepted? We don't need a full answer to the former in order to achieve the latter.
LOL, if your in college, go up to your econ proff, and make a comment about one of mainstream econs inconsistencies. you will find very quickly why it isn't accepted
mickanomics: DD5: mickanomics: DD5:And by the way, the theory in issue 1 is not the Austrian theory Really? I thought it was. If I'm mistaken, then my apologies... can you clarify... ABCT is not a theory of intratemporal distortions but of intertermporal distortions. I have no idea what you are saying.
Hi mickanomics,
The ABCT states that credit expansion distorts the market rate of interest by making present goods appear artificially cheap in terms of future goods. This is an INTERtemporal distortion, because it is a discoordination in the appraisals of goods in BOTH the present AND the future (different time periods). "INTRAtemporal distortion" would imply that the discoordination occurs regarding the appraisals of goods WITHIN the same time period, which is not the case.
For more on this, check out my article Of Time and Marshmallows.
Hope this helps.
So, the consensus view in this thread is that mainstream economists don't accept ABCT because they are either
a) stupid/intellectually lazy
b) politically biased
c) all of the above
These seem like very weak arguments to me. Not the least because it doesn't explain why some brilliant Austrian economists don't come along and blow idiotic mainstream economists out the water with flawless counter arguments.
Is it because Austrians are unpopular? Because they lack government funding for their research? Because they are staunch libertarians (unlike statist mainstream economists)?
These are popular fall back arguments but I don't find them convincing either. Look at Milton Friedman. He was a very unpopular, libertarian economist who did his most important work without government funding. Yet, he fundamentally changed the course of economic science.
Was Friedman an anarchist? No. But why would that be the criteria? Neither was Hayek or many other Austrian economists.
So why is ABCT unpopular? Personally, I think its because there is very little empirical work backing it up. Friedman's Monetarism would likely have had little impact if it were not for his "Monetary History of the United States". Similarly, I don't think ABCT will catch on until there is an extensive attempt to quantitatively assess its historical validity. And by that, I mean more than mostly qualitative case studies of individual historical episodes.
Of course, this won't happen so long as Austrians pretend to be allergic to empirical study.
Ambition is a dream with a V8 engine - Elvis Presley
PS* I imagine the first response to my post will be about the futility of empirical study. Whether or not that is true, that is irrelevant to the question of why ABCT is not accepted by mainstream economists. For better or worse, they expect some sort of empirical backing.
If you are unwilling to supply it, don't be surprised that ABCT is largely ignored. I guess the penalty of purity is obscurity.
Student: So, the consensus view in this thread is that mainstream economists don't accept ABCT because they are either a) stupid/intellectually lazy b) politically biased c) all of the above These seem like very weak arguments to me. Not the least because it doesn't explain why some brilliant Austrian economists don't come along and blow idiotic mainstream economists out the water with flawless counter arguments.
Well, if you re-read my comment, you will notice that I don't really attack mainstream economists per se (though plenty of economists are politically biased), but rather the incentive structure created by the government and special interest groups. I will probably be employed by such institutions, and I wont talk about Austrian economics. Furthermore, the educational system is extremely rigid, teaching theories which even the mainstream has abandoned.
Student:These are popular fall back arguments but I don't find them convincing either. Look at Milton Friedman. He was a very unpopular, libertarian economist who did his most important work without government funding. Yet, he fundamentally changed the course of economic science.
Well, it depends on how you define libertarianism. The man supported anti-trust, monetary nationalism, and monetary central planning. But either way, his theories were accepted way before he ever became an economist. They were originally put forth by Frank Knight and Irving Fisher. The Chicago school predates "Monetary History of the United States."
Student:So why is ABCT unpopular? Personally, I think its because there is very little empirical work backing it up.
We have a lot of empirical evidence which support our claims. Even Keynesian economists are beginning to look at the role of interest rates in inflating asset bubbles, whereas before it was just "animal spirits," or psychological chaos. But either way, Austrians have already won this debate in the latter part of the 19th century. How many times do they need to refute historicism before it's no longer taken seriously? Menger spent his whole career destroying this nonsense.
Student:Not the least because it doesn't explain why some brilliant Austrian economists don't come along and blow idiotic mainstream economists out the water with flawless counter arguments.
Oh, they have. Read "Mythology of capital" (response to Frank Knight), "The Paradox of Saving" (response to Catchings), and "Reflections on the Pure Theory of Money of Mr. J.M. Keynes," where Hayek obliterates his entire framework (what was supposed to be his Mangum Opus). This list could be 100 pages long (see W.H Hutt, who wasn't technically Austrian).
Keynes went from a classical liberal, who worked with the Wicksellian framework (though a butchered version of it), to an interventionist who brought back already refuted mercantilist doctrines (made him the most famous economist of all times). Now, I understand that most Keynesians today don't really care about Keynes, but synthesizing the General Theory with Chicago economics hasn't taken us anywhere.
If you read Austrian literature, you will see that it's the mainstream that fails to address our points, and not the other way around. This is the nature of paradigms: they sit in their bubble until a crises elevates another school of thought to the mainstream. This stuff doesn't make sense:
Again, this list could be 100 pages long. Can you guys even explain why profit exists?
Student:very little empirical work backing it up
That would explain it...
...but surely you just need a little historical data and an excel spreadsheet and we can soon clear that up... having said that, it seems that M3 data is only available for an incredibly short period in us history (well at least on the St Louis fed website). I am keen to plot M3 growth vs P/E(10) growth (http://www.econ.yale.edu/~shiller/data/ie_data.xls) over an extended period, perhaps with a house price growth plot at the same time.
Esuric:We have a lot of empirical evidence which support our claims.
Would you like to give a reference?