Friday, August 7, 2009

Misconceptions about Austrian Business Cycle Theory


I'm very happy that ABCT is being talked about and debated these days, however, those who are critical of it (Brad DeLong, Paul Krugman, et al), get one thing wrong. The length and depth of the recession need not be explained by sectoral reallocation alone. DeLong has been particularly willful on leaving out this point. The ensuing panic caused by such misallocations (what Hayek called the secondary downturn), may and sometimes does have a much larger impact. In terms of MV=PQ, when people rush to hold cash and less risky assets, V drops. If M is not increased to counterbalance, this deflation can lead to a decline in Q, as P will not adjust immediately. This part of the recession occurs completely independently of the sectoral shifts.

The critics should acknowledge this, or at least acknowledge that Austrians acknowledge that magnitudes between boom and bust need not be symmetrical. Friedman dismissed the link between the bust and the preceding boom. Austrians link the two, but there need not be a 1-to-1 ratio in magnitudes.

5 comments:

  1. Ummm...

    "[W]hen people rush to hold cash and less risky assets, V drops. If M is not increased to counterbalance, this deflation can lead to a decline in Q, as P will not adjust immediately. This part of the recession occurs completely independently of the sectoral shifts..." is the *Keynesian* story.

    Where Austrianism goes wrong is in its claim that you can't fight the Keynesian depression because doing so will inhibit the process of sectoral shift...

    ReplyDelete
  2. "Austrians acknowledge that magnitudes between boom and bust need not be symmetrical..."

    And yet you have insisted (elsewhere) that sectoral misallocations in the capital structure suggested by ABCT must necessarily be symmetrical during periods of monetary inflation (booms) vs. periods of monetary deflation (busts).

    How does one tell when to assume that things must be symmetrical and when they do not have to be?

    ReplyDelete
  3. Brad-

    The MV=PQ framework is not exclusively Keynesian. See, for instance Hayek, Garrison, Selgin, White, etc.

    I agree with your second part though. Sectoral shifts back toward equilibrium can occur while fighting delfation. I hear many lay Austrians these days talk about inflationary policy and anti-delfationary policy as if they were the same thing.

    ReplyDelete
  4. mb-

    I have never suggested that sectoral misallocations must be symmetrical. Perhaps you are confusing my position that delfationary periods also cause disequilibrium in relative prices the same as inflationary periods. I never suggested that these relative price distorions need be symmetrical with the boom. In fact, I believe it was you that suggested that the bust liquidation would just take care of itself i.e., there was no need to combat deflation because the liquidations would just be those "exact" malinvestments that wouldn't have occured in the first place.

    ReplyDelete