With friends like GMU Professor Tyler Cowen, Austrian Business Cycle Theory doesn't need enemies. In the below Koch-funded Institute for Humane Studies clip about ABCT, Cowen provides us with a shaky overview of ABCT. He mentions that some Austrians call for a "monetary rule" to manage monetary policy. However, his definition of Austrian must be very broad since I know of no one from within the mainstream Austrian Mises-Rothbard school calling for a "monetary rule". Such a rule is more associated with Milton Friedman's Chicago school. And I don't know anyone who has been so bold to call Friedman an Austrian. Cowen then comments on the "weaknesses" of ABCT.
He identifies two supposed weaknesses of ABCT.
First, he suggests ABCT fails because entrepreneurs would recognize an ongoing inflation and thus adjust their business activities to counter the inflation and thus suffocate any boom part of the business cycle. This Cowen statement can be decimated on two levels, both empirical and theoretical.
Although empirical studies can not be used to form theories in the science of economics, they can be used to refute theories that do not fit reality. Cowen's charge that entrepreneurs will recognize a boom and thus act in ways to prevent the boom is slapped in the face of the evidence of the current financial and economic crisis. Trillions have been lost by entrepreneurs who failed to anticipate the consequences of the boom-bust cycle. This is evidence alone that Cowen is wrong about entrepreneurs anticipating the business cycle.
But, there is an even greater problem with Cowen's theory of entrepreneurs countering the business cycle. In his theory he is using excessive Keynesian-type aggregation to make his point. He aggregates all entrepreneurs together and talks as if they all hold the same view. This is simply absurd. Some entrepreneurs ( a very few) may understand ABCT. Some entrepreneurs may have lived thorough previous business cycles, not understand the theory, but hold a view that "what goes up must eventually come down."
Finally, there may be entrepreneurs who have no fear of a money-created boom.
In the real world, those who understand ABCT may certainly stay out of the boom borrowing game, but this does not mean all will. Those who understand ABCT and those who hold the "what goes up must eventually come down" theory may also play the debt borrowing game by simply insuring the investment/borrowing structure they use protects them personally once the collapse occurs.
In early 2007, before it was obvious a serious financial crash was starting, I attended the Beverley Hills Michael Milken Conference that year. In panel after panel, which included billionaire after billionaire, almost all the panelists shook their head and said they did not believe how high asset prices (including housing) were going and that the music was likely to stop soon. But they also indicated that they were continuing to raise money while it was still available, because they didn't know when the music would stop. Left unsaid, but certainly understood by all, since they expected an ultimate crash, was that although they were raising money, the structure of the investment vehicles they were using protected them from personal loss once the crash came.
Finally, we have those who do not fear a crash. These are all that are needed for a boom bust cycle to occur. If there is only one person in the world that does not fear a boom, then he can be the person through which all money is funneled to get out into the system to create the boom. In actuality, given the number of businesses that failed and the number of people who lost their houses, it is obvious that from big to small many outlets were available through which banks were able to pump out new money, even if their were very skilled entrepreneurs who feared a crash. Entrepreneurship in not about monolithic thinking, it is about entrepreneurs with very different views. Some may fear money printing, others may not, and still others may be aware of the dangers of money printing, but know how to game the system and protect themselves from the ultimate crash.
In short, aside from a world where ALL entrepreneurs fear the business cycle AND in addition there are no investment vehicle structures allowed that will protect entrepreneurs from personal losses and allow them to play the game until the crash comes, Cowen's contention that because of entrepreneurship the business cycle can not develop is simply nonsense.
Cowen's second claim is that some business cycles are caused by a monetary contraction without a previous expansion.
I know of no historical example where money supply spontaneously collapsed without a previous inflationary expansion. This includes the collapse of money in the early 1930s, which followed upon a prolonged and large monetary expansion during 1921-1928 (6-7 percent per year)
I hereby challenge Cowen to come up with examples where the nominal quantity of money suddenly contracted during a period of normal (i.e., noninflationary) economic activity, as he states has occurred.