Murray Rothbard, (2005, p.182)
"I shall try to show that (a) the price level is frequently a misleading guide to monetary policy and that its stability is no sufficient safeguard against crises and depressions, because (b) a credit expansion has a much deeper and more fundamental influence on the whole economy, especially on the structure of production, than that expressed in the mere change of the price level. The principle defect of those theories is that they do not distinguish between a fall of prices which is due to an actual contraction of the circulating medium and a fall in prices which is caused by a lowering of cost as a consequence of inventions and technological improvements"
Harberler, in “The Austrian Theory of the Trade Cycle and other essay” 1996, Mises Institute (p.46-47)
"If we have, however, once realized that at the bottom of these surface phenomena lies a far-reaching dislocation of productive resources, we must lose confidence in all the economic and monetary quacks who are going around these days preaching inflationary measures which would bring almost instant relief"
Harberler, in “The Austrian Theory of he Trade Cycle and other essay” 1996, Mises Institute (p.61)
Update: Pete Boettke has initiated a discussion about deflation. He draws in George Selgin's argument regarding the productivity norm, and The Economist also weighs in,
In the comments to Pete's post Selgin himself makes a useful point:
"Taking "deflation" to refer to a general downward movement in prices of final goods, the Rothbardian claim that deflation is a necessary step in recovery from an Austrian-type malinvestment cycle is just plain bad economics, and bad Austrian economics at that. Consider: the boom involves a _temporary_ distortion of relative prices, including artificially low interest rates, due to excessive M growth. The boom is unsustainable because factor prices eventually "catch up" to their GE values. In other words, the corrective purge doesn't require any contraction of nominal M or absolute deflation. Such deflation (the "bad" kind, according to my prod. norm. argument) only does more harm, by putting relative prices off track again.
As Mises correctly observed, to rely on deflation to make up for damage done through inflation is like backing over your neighbor's cat to make up for running it over in the first place."
Fine. He also says "In any event, the boom ends because relative prices have adjusted, so there's no need at that point to resort to deflation to make them adjust!" But this raises the issue of time periods. To say that "prices eventually "catch up" to their GE values" is clearly operating within an equilibrium framework. To say that "prices have adjusted" is obviously inconsistent with a view that we live in a world of disequilibrium. I think Austrians might be inconsistent on this. Is the "credit crunch" observable? Is it merely a conceptual way to view the momentary disjoint between an artificial boom and a recovery? Data limitations make it hard enough to witness the stages of an Austrian cycle, but when Austrians make empirical claims (such as the boom coincides with a buoyant stock market) these are verifiable.