Sunday, December 28, 2008

Tyler Cowen's "Sector Analysis"

Tyler Cowen has made no secret that he does not believe in Austrian business cycle theory, but, today, he has a long rambling post on fiscal stimulus, supposedly about when it will work and when it won't.

I will leave the majority of the post for others to dissect, but there is one section of the post which I found fascinating. Cowen writes (my emphasis):

Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts. That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)
What is fascinating about this is that I think Cowen is really describing Austrian business cycle theory but doesn't realize it.

Now if there are basic things that are understood by all about ABCT, it is that the theory is based on the belief that the business cycle occurs because central banks distort the structure of production by printing money that ends up first in the capital goods sectors (with a very broad definition of capital goods). Further, as Murray Rothbard notes:

An adequate theory of depressions, then, must account for the tendency of the economy to move through successive booms and busts, showing no sign of settling into any sort of smoothly moving, or quietly progressive, approximation of an equilibrium situation. In particular, a theory of depression must account for the mammoth cluster of errors which appears swiftly and suddenly at a moment of economic crisis, and lingers through the depression period until recovery.
Note Rothbard discussing ABCT, he writes of a "mammoth cluster of errors."

Note Cowen, he writes of "series of massive sectoral shifts".

Mammoth cluster? versus Massive series? Cluster of errors? versus Series of sectoral shocks? Cowen may not realize it, but what he sees in the economy is exactly what ABCT theorists would expect to see.

Further look at the sectors he lists as having "real" shocks. He sees:

a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)
To an ABCT theorist, they pretty much look like a list of problems in the capital goods sector. Out of construction? Check, a capital goods biz. Out of finance? Check-the very heart of capital goods financing. Debt-financed consumption? Notice how careful Cowen is here, and correctly so, it is debt financed consumption where problems exist. Check,this would fall under a sector financed by money printing credit creation. Luxury goods? The people buying luxury goods during the boom times are the ones who are getting the money first, this sector would suffer now, check. GM? Capital goods again, check.

The only area that does not easily fall into the ABCT theory is the newspaper, book sectors which are being hurt by the growth of the internet, but this stuff, new industries growing/old industries dying, happens all the time and falls under another Austrian theory, that of Joseph Schumpeter's creative destruction.

Cowen may try and argue that there are "real" factors behind problems with finance, GM etc. (and there may be some), but that still does not explain why all these failures have become,as he puts it, a "series of massive sectoral shifts" all at the same time.

It's the cluster of errors queston that only ABCT answers. In short, Cowen may not believe ABCT theory, but his observations are ABCT all the way.


  1. Markets are going through major shifts related to advances in digital solutions and global access to low-cost resources. Those companies that will thrive are those that will create new solutions which adjust to these shifted markets. Just because a company survived last year and has a few bucks does not mean it will succeed in 2009 and onward. It requires innovation to deal with these major changes, and only those companies that innovate will create returns allowing them to emerge as strong, viable competitors. Read more at

  2. I think you probably know about this, RW, but just in case: BACK IN 2005, Tyler unwittingly showed the predictive power of ABCT, while denying his belief in it. Check it out, there are some pretty good predictions.

  3. Yeah, he's some kind of Austrian in denial.

  4. Let's take a cue from the Jews, shall we? From now on, an economist like Tyler will be referred to as a "self-hating Austrian."

  5. "Self-hating Austrian", I like it.

    It fits Tyler to a "T".

  6. You're really stretching it. Cowen at best described at length the specific face of creative destruction in the US right now, if you want to find an austrian cut to it. But the entire austrian theory of capital does not follow from the general idea that misallocation of resources is a bad thing. Was David Hume a closet austrian?

  7. Oh yeah,I forgot that Tyler described "creative destruction" before Schumpeter.

    And, I don't know why RW brought up the similarity in Rothbards' writing and what Tyler had to say. Everyone knows Tyler was pre-Rothbard.

    Thanks for the enlightenment, Diego.