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.
mickanomics:Would you like to give a reference?
Quick examples:
Either way, it's not the economists job to explain why there was inflation in China in 19xx. It's the job of economists to explain why there is inflation in general, and to identify its cause/remedy. You can look at your empty statistics all day, but it will never make you an economist. The problem is that people are ignorant of Austrian economics and its positions; which, once understood, seem blatantly (ridiculously) obvious.
"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."
Esuric: Quick examples: Fed funds rate went to 7% in 2006. There is a massive world wide shortage of food. Low interest rates led to a bubble in housing (long-term durable good).
"We have a lot of empirical evidence which support our claims." Really?
An amazingly thin collection of "statistics". I was hoping to see something with graphs.
Do you want to see a graph of the interest rate going to 7%? Or a graph of appreciating housing values? Will this make you feel like a real economist? Do you think it will give you the credibility you desire?
Esuric:Do you want to see a graph of the interest rate going to 7%?
Hell yes! And with the data on either side, preferably for many decades.
Esuric:Or a graph of appreciating housing values?
Yes!
Esuric:Will this make you feel like a real economist?
I'd just like to see the evidence with my own eyes.
mickanomics:I'd just like to see the evidence with my own eyes.
And what will these graphs do for you when you don't understand Austrian economics in anyway whatsoever? Do you think that staring at them long enough will explain why the price mechanism failed to coordinate production?
Here:
Go nuts.
Esuric:Go nuts.
Having "gone nuts" looking at your links. I was disapointed to note that not a single one included money supply data. So none of them would help verify or refute ABCT. And three of your links had data for two years or less. What kind of statistics could I do with that?! I want to see graphs going back to before the great depression!
Student:So why is ABCT unpopular? Personally, I think its because there is very little empirical work backing it up.
Basically, every major boom/bust cycle in the past 200 years supports ABCT.
Go to pp-476 Ch 18, part 6 Empirical Evidence for the Theory of The Cycle in "Money, Bank Credit, and Economic Cycles" from Huerta de Stoto
Student:Friedman's Monetarism would likely have had little impact if it were not for his "Monetary History of the United States".
So anybody who publishes a book with a ton of empirical and historical data is somehow validating his theories?
mickanomics: Esuric:We have a lot of empirical evidence which support our claims. Would you like to give a reference?
Esuric:We have a lot of empirical evidence which support our claims.
Would you like to give a reference?
pp-476 Ch 18, part 6 Empirical Evidence for the Theory of The Cycle in "Money, Bank Credit, and Economic Cycles" from Huerta de Stoto
DD5: Go to pp-476 Ch 18, part 6 Empirical Evidence for the Theory of The Cycle in "Money, Bank Credit, and Economic Cycles" from Huerta de Soto
Some quotes from that book...
"The Crisis of 1882. Credit expansion resumed in 1878 in the United States and France.""The Crisis of 1890–1892. Credit expansion spread throughout the world in the form of loans directed mainly to South America.""The Crisis of 1907. In 1896 credit expansion was again initiated and lasted until 1907."
De Soto seems strangely reluctant to put any numbers to these episodes. And why no graphs? And what are his sources? He may be completely correct in everything he says, but its hardly going to be persuasive to a sceptic. Its beginning to become clearer, why the Austrians have not convinced the mainstream.
mickanomics:"The Crisis of 1907. In 1896 credit expansion was again initiated and lasted until 1907 And what are his sources? "
And what are his sources? "
Here is a footnote from the book:
"91 For a more detailed historical outline of the crises and economic cycles
from the dawn of the Industrial Revolution until World War I, see, for
example, Maurice Niveau, Historia de los hechos económicos contemporáneos,
Spanish trans. Antonio Bosch Doménech (Barcelona: Editorial
Ariel, 1971), pp. 143–60."
mickanomics:Its beginning to become clearer, why the Austrians have not convinced the mainstream.
Yeah, because there is simply no competing with the vast amount of empirical evidence that supports the mainstream alternative views. Unbelievable!
It is beginning to be more and more evident that you are just trolling.
You're arguing with someone who thinks he knows everything but knows very little about Austrian econ yet is unwilling to do much in-depth reading other than trying to appear to be contrarian every now and then on the forum. Just thought I'd inform you.
So none of them would help verify or refute ABCT.
Because they couldn't. At best they could more or less convince mainstreamers. Nothing more, nothing less. The only question regarding the ABCT is if it applies to a particular phenomenon (barring errors in axiom formation/deduction.) Not whether it is "refuted" or not by some set of data. Seriously, read some of the work on its method and get a clue already.
Freedom of markets is positively correlated with the degree of evolution in any society...
DD5:It is beginning to be more and more evident that you are just trolling.
Yup.
Esuric,
I personally wouldn't call just looking at graphs "empirical support". However, that is basically what most Austrian empirical papers come down to (at least in the past, there are thankfully a growing list of exceptions).
I am talking about rigorous statistical analysis that is of such a high quality it can be published in main stream journals. When Austrians can do that, then they will see acceptance.
Ambition is a dream with a V8 engine - Elvis Presley
Student: Esuric, I personally wouldn't call just looking at graphs "empirical support". However, that is basically what most Austrian empirical papers come down to (at least in the past, there are thankfully a growing list of exceptions). I am talking about rigorous statistical analysis that is of such a high quality it can be published in main stream journals. When Austrians can do that, then they will see acceptance.
Please go back a page and read my response to your initial comment. I'd like to see how someone knowledgeable in mainstream economics answers my questions/addresses my points. I was hoping to talk to you, but Mickanomics needlessly pushed us to another page.
Esuric: 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: homogeneous production functions which view capital as a perfectly supplementary self-replenishing blob. finite Markov chains which have fixed probabilities. the fact that inflation does not affect all incomes and prices in the same degree or even in the same direction. cardinal utility, or the stupidity of aggregating all investments into one category (I). Again, this list could be 100 pages long. Can you guys even explain why profit exists?
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?
Well, I have never read the Paradox of Savings, but I am familiar with the other two articles you mention. First, the Mythology of Capital was merely one in a series and articles and letters that were written by Hayek and Knight over the course of several years. And, as Avi Cohen notes in his quasi-recent summary of the Hayek/Knight debate, it didn't really end in a decisive victory, but more or less with the two giving up on trying to convince the other (see link below, if you don't have access let me know and I will upload a copy). http://muse.jhu.edu/login?uri=/journals/history_of_political_economy/v035/35.3cohen.pdf
Personally, I have little interest in capital theory. But, what time I have spent trying to understand it has left me with the impression that both Hayek and Knight had good points. I agree with Hayek that Knight's conception of capital as a "permanent fund" has its flaws, but like Knight I don't think the Austrian perspective provides a better alternative.
But the debate of Austrian capital theory did not end in 1936. Fast forward to the 1960s and you will find the Cambridge Capital Controversy, where mainstream economists like Paul Samuelson examined the implications of Austrian capital theory and found them wanting (he also found neoclassical capital theory wanting too if that makes you feel better). Avi Cohen has a good article (ungated) that I think does a nice job of effectively describing Samuelson criticisms.http://econ.yorku.ca/~avicohen/Linked_Documents/JEP_Cohen_Harcourt.pdf
Later, in the 1970s, John Hicks (nobel prize winner and someone that could be said to be as much of a founder of Keynesian Economics as John Maynard Keynes himself) tried to incorporate Austrian Capital theory into a mainstream framework. http://books.google.com/books?id=9oS73M9zZuYC&dq=John+Hicks+Neo-Austrian&printsec=frontcover&source=bn&hl=en&ei=BAJnS6qfJM-0tgeZvMG4Bg&sa=X&oi=book_result&ct=result&resnum=4&ved=0CBMQ6AEwAw#v=onepage&q=&f=false
Yet, again, mainstream economists found even this reformulation of Austrian Capital Theory to be wanting...http://ideas.repec.org/p/duk/dukeec/02-19.html
Now, like I said, I am not personally very interested in capital theory, so I don't want the weight of mainstream economics to be resting on my shoulders during this part of the discussion discussion. I only mention these episodes as examples of the mainstream thoroughly engaging Austrian Capital Theory several time over the course of decades and each time finding it wanting. And let me stress these are not minor figures in these debates. These are Nobel Prize Winning Mainstream Economists. If these brilliant, brilliant people are just "misunderstanding" Austrian Capital Theory, then I think the problem is that Austrians are not effectively conveying their points. In any case, If you think the mainstream assessment is falsely rejecting Austrian Capital Theory time and time again, its up to you (and other Austrians) to keeping coming back and trying to change their minds by publishing more articles in mainstream journals.
Now, with regards to "Reflections on the Pure Theory of Money of Mr. J.M. Keynes", I don't think I would list that among the great refutations of mainstream theory since even Keynes abandoned many of the ideas that Hayek criticizes. I would much rather see an Austrian attack on modern "New Keynesian Economics" that actually gets the basic tenants of New Keynesianism right. That would be very interesting.