Quote of the day: Mario Rizzo

The Austrian theory, however, is not a complete theory of the business cycle. It accounts mainly for the process leading to and including the cycle’s upper turning point. It is a theory of the crisis. How long the resulting recession lasts is not predicted by the theory or even, strictly speaking, by the degree to which resources were misallocated. The length of the recession will depend, for example, on those factors affecting the mobility of resources.

Rizzo, Mario J., 2009. “Austrian economics: recent work” The New Palgrave Dictionary of Economics, Online Edition

Comments

[Pietro M.]

I read the draft of the paper, very interesting.

This claim is quite common, e.g., it can be found also in Garrison's Time and Money. I think its historical origin was the need of defending ABCT against the critique of not being able to explain the severity of the Great Depression.

This makes sense, and it is true that ABCT is much more detailed about the boom than the bust (although there are microeconomic reasons for the bust even without these additional analyses), but there *is* an austrian theory of (accelerators of) crises.

1. the last part of "capital and production" by Strigl is about the process of "financial acceleration" caused by the destruction of credit during the bust.

2. Horwitz's theory of deflation is an alternative non-financial (but monetary) approach to these acceleration processes.

3. This has never been said explicitly, probably because it is too obvious (although Mises stated the contrary in HA): if prices fall by 10%, the minimum real rate of interest is 10%. In these conditions, no one will ever invest, because there is such a huge floor on real rates. When banks stop falling down, prices get stable and the floor on real rates is removed.

My conclusion is that if there is a problem which limits the acceptance of ABCT among non-austrian economists, is not the problem of the severity of the recession: it's about explaining why monetary policy has the specified effect on the structure of production.

PS My impression is that the Great Depression is so evidently an outlier that the fact that it has affected economic theory so much is difficult to justify with cold blooded scientific reasoning. An historical unicum should be treated as a special case, not as an inspiration for general theories.

[aje]

I wouldn't take it too far, and argue that Austrians have nothing to say about the downturn, but note that Horwitz relies a lot upon alternative approaches. That doesn't mean he doesn't provide an Austrian account, but that this then turns into a debate about Austrian uniqueness.

[Pietro M.]

This is probably linked with the other thread I commented earlier.

I've tried to come to grips with the theories of "holy sh*t! I'm going inside my production possibilities frontier": I call them "accelerators".

Monetary deflation is one of these accelerators. Credit deflation is another one.

Without accelerators, the recession would just be the sudden recognition of an inward shift of the economy withing the PPF.

In the real world, we move within the PPF during sudden crises. Strigl's analysis of credit deflation is chronologically "very Austrian". I tend to value financial accelerators more than monetary ones, at least intuitively, but there can be some scope for adding a monetary accelerator. The relative size of the two may be investigated, but my priors is that on average financial factors rule the roost of the inward shift (and its eventual persistence).

PS I don't care much about "uniqueness". There is only good and bad economics. Uniqueness is in the structure of production and its monetary-driven unsustainable expansion, but there are many other complicating factors, from "real shocks" to "credit channels" which affect the behavior of the economy. That the economy can experience a boom driven by inherently self-reverting factors is the unique aspect of ABCT.

[MBT Shoes]

It's so nice to have you do all of the research for us. It makes our decision making so much easier!! Thanks.