Economics Questions

Re: Murphy Responds to Krugman and Explains the ABCT

xahrx — Tue, 25 Jan 2011 17:03:12 GMT

@Student,

I think the answer comes with the idea of 'meshing' in the intertemporal coordination of resources. Capital has to be maintained, expanded, and contracted in coordination in space and time. Think about it in functional terms. For example, increasing efficieny in use of fossil fuels is basically the same as increasing production. I'ts not like if I use a barrel less a year of oil that it's going to accumulate with a bunch of guys scratching their heads wondering what to do with it. In the same way, failure to coordinate capital maintenance, expansion and contraction in line with what your suppliers are doing and your buyes are expecting would be functionally the same as letting your equipment rot, building a plant that's too big and/or hiring too much labor, or laying off too much labor and/or liquidating equipment it turns out you actually needed. So there need not be someone doing something blatant and technically stupid like running his trucking fleet into the ground, but how that fleet is maintained relative to the suppliers of maintenance services and the buyers who are expecting to draw on the trucking resource is what's at issue and functionally the same.

Put another way, malinvestment need not just be an investment that was undertaken and found to be unprofitable, but also an investment that was foregone that would have been profitable. Investment gets miscoordinated in both directions, since there are only so many real resources then over investment in one area has to mean a shortfall elsewhere. So capital consumption, that is the blatant and intentional neglect of capital is really just a subset of malinvestment of the underinvestment type.

At least that's what I'm reading into it.

Re: Murphy Responds to Krugman and Explains the ABCT

Isaac "Izzy" Marmolejo — Tue, 25 Jan 2011 16:52:42 GMT

I guess we'll see what he is talking asbout in a couple of months from his model

Re: Murphy Responds to Krugman and Explains the ABCT

Student — Tue, 25 Jan 2011 16:10:38 GMT

Izzy,

I posted mu concerns on the coordination problem blog (as "Dee Williams") and Murphy was kind enough to respond (http://www.coordinationproblem.org/2011/01/murphy-responds-to-krugman-on-the-austrian-theory-of-the-business-cycle.html#comments). Apparently, he is indeed trying to expand on Garrison's work (it would have been nice if he had stated this explicitly in his blog post as i think this only leads to confusion about where Murphy differs from more established ABCT). He says that he is working on a new model that will dissolve the apparent contradiction I am seeing. I wish him luck. But until then I don't think this short paragraph is enough to really respond to Cowen's criticism.I look forward to seeing how Murphy and others continue to address the Cowen's argument as time goes by.

Re: Murphy Responds to Krugman and Explains the ABCT

Isaac "Izzy" Marmolejo — Tue, 25 Jan 2011 07:39:22 GMT

you should email Murphy, he usually replies the next day after the email.

Re: Murphy Responds to Krugman and Explains the ABCT

Student — Tue, 25 Jan 2011 06:52:09 GMT

It is an interesting post. But I don't really understand Murphy's Response to Tyler Cowen (who said that Murphy's exposition implies that spending on capital maintenance should decline during the boom phase, but that isn't what we see happening the real world).

Specifically, Murphy says:

Unfortunately, my fable and the lessons I drew from it gave the impression (see Tyler Cowen's critique) that the Austrians think the "capital consumption" during the unsustainable boom period must show up in things like reduced spending on building maintenance, or perhaps in the owner of a fleet of trucks neglecting to have the tires rotated.
In reality, it's more accurate to say that during the boom period, entrepreneurs (led by false signals) invest in projects that are individually rational and "efficient," but that don't mesh with each other. In other words, it's not so much that a farmer forgets to plant some of the seed corn in order to have a future crop. Rather, it's that a farmer plans on expanding his output, and so he plants much more than he did in the past, but unbeknownst to him, the owners of the silos and railroads (needed to bring the harvest to market) aren't expanding their own operations at the same pace.

However, there are two things about this argument that don't make sense to me.

Murphy is openly pulling the theory behind his original sushi story from Roger Garrison's work on ABCT. However, Roger Garrison says explicitly that the increase in consumption and new investment during the boom will be funded in part by "by the undermaintenance of existing capital" (http://www.auburn.edu/~garriro/strigl.htm). So by saying that capital need not be under maintained during the boom, Murphy seems to be parting from his source material in the quote above (not a bad thing, just need to make sure it is indeed the case Murphy means to break new ground with this argument).
If Murphy is truly parting with Garrison and claiming that capital is not under maintained during the boom, then I don't see why output would fall when the investment bubble collapses. Specifically, in responding to Cowen, Murphy uses an example of corn growers and silo owners. He says that during the boom the corn grower will invest in expanding his production capability, but that silo owners will not expand their operations at the same pace. But even if that were true it would only explain why production doesn't increase during a recession (the silo owners, railroad owners etc have not increased their capacity enough). It would not explain why production would *decline* during a recession, and that is the real question we would like to answer. .

Re: Murphy Responds to Krugman and Explains the ABCT

Gero — Tue, 25 Jan 2011 02:35:03 GMT

Economist Robert P. "Bob" Murphy’s polite and thorough response to economist Paul Krugman was expected. If Krugman responds, a debate could ensure. That would increase awareness of Austrian business cycle theory and the Ludwig von Mises Institute.

If Krugman is interested in debate, in addition to Murphy, I suggest he debate economist William Anderson who is quite critical of him.

Re: Murphy Responds to Krugman and Explains the ABCT

mouser98 — Tue, 25 Jan 2011 00:45:37 GMT

Murph easily slams Krugman to the mat but Krugman, his mind ensconced in his ivory tower, still thinks he is winning.

Murphy Responds to Krugman and Explains the ABCT

Daniel James Sanchez — Tue, 25 Jan 2011 00:23:16 GMT

http://mises.org/daily/4993