In the comments, I respond to Rizzo's view this way:
I have no problem with ending name calling, but Dr. Rizzo when you refer "to various strains of Austrian economics" debate. I'm not sure that it properly frames the current situation.At the time I wrote this comment, I was specifically thinking of Tyler Cowen (who expressed his view to me that ABCT was a religion) and Tom Plamer has done so in writing. But now that I think about it more, those who have charged that ABCT is a religion go far beyond Cowen and Plamer. Krugman has done so. And we all know there have been whispers about "those Austrians and their religion" in faculty rooms on campuses across the country.
We now have at least two people who have called ABCT a religion. That doesn't sound like a strain, but more of a denial.
I'm all for a summit debate "Is ABCT a Religion?", but I am afraid that many students of ABCT would consider such a debate an insult, and I wonder if the other side would show up.
But, if we are all seeking truth, let's get it all in the open, act like scholars, stage the summit and have all the best arguments pro and con on record and published.
I think ABCT would not only survive such a summit, but become even stronger.
Tyler Cowen/Tom Plamer are you in?
In truth, I think all those who have made such charges, even those who have done so in a malicious manner, probably believe that ABCT is a religion.
I think they are greatly mistaken, but I think it is time we systematically analyze their claims and point out the deficiencies in their arguments, of which I think there are many.
So I agree with Dr. Rizzo that the name calling should stop. Now we need to know who is willing to openly debate the issue and who is unwilling to grant the other side a platform for debate.
I leave to others to decide a format and platform for such a debate, but let's treat everyone seriously and get it on!
You really need to get your facts straight. I don't know what Cowen said to you in private, but Palmer did not call ABCT a religion. He criticized a religious attitude toward it. That is a BIG difference. ABCT is Austrian Business Cycle THEORY. Theories should be debated and reasons for and against given. The theory is not a religion, but the attitude some people show to it is religious. Get your quotes straight before you go on and on repeating untruths. Or is that your goal?
ReplyDeleteCase in point: "2. I’m not criticizing “ABCT” in general, either. I’m not committed one way or the other. I’m asking whether the theoretical account in Woods’s book (and not some other version in some other essay somewhere else) accounts for what happened. Woods himself sets a test on p. 82, after much insistence that “Austrian business cycle theory” explains what has happened in the present crisis: “If Austrian business cycle theory is correct, we should expect the most significant declines to be in the capital-intensive industries in the higher-order stages of production.” He applies that to the Japanese economy in the 1990s and cites a 2002 article by Ben Powell in the Quarterly Journal of Austrian Economics on “Explaining Japan’s Recession.” Note the words, “If Austrian business cycle theory is correct….” It suggests that if that is not what happens, Austrian business cycle theory is not correct. So, did we see “the most significant declines in the capital-intensive industries in the higher-order stages of production”? Is that what happened in the current case? Was the crisis a rippling out of the process he describes? Is it the case that the crisis was due to overinvestment in the “home construction” industry? (“Artificially low interest rates misdirected enormous resources into home construction.” P. 75) Was a collapse of the “home construction” industry the source of the problem, and not, perhaps, a financial house of cards built on a speculative bubble? Is it the case – and Woods cited it specifically on p. 82 as a test of “ABCT,” that “As the company works towards completing its projects [TGP: in this case, for Woods, it is “home construction”], it will find that the resources it needs, such as labor, materials, replacement parts – called by economists ‘complementary factors of production’ – are not available in sufficient quantities. The pool of real savings turns out to be smaller than entrepreneurs anticipated, and thus the complementary factors of production they need wind up being scarcer than they anticipated. The prices for these parts, labor, and other resources will therefore be higher than entrepreneurs expected, and business costs will rise.” Is that what happened? Did the home construction industry find that labor, parts, and other “complementary factors of production” rose higher than entrepreneurs expected, which caused them to stop building homes and lay off workers, which caused a crash? Yes, or no?"
http://austrianeconomists.typepad.com/weblog/2009/11/the-battle-of-the-toms/comments/page/2/#comments
@Annonymous
ReplyDeleteIt sounds to me like Palmer is calling ABCT a religion. He writes:
Norberg is a smart guy, a meticulous researcher, and a good writer, but because it’s an exercise in economic analysis and financial journalism, with no religion thrown in. (As an example of the latter, the book Meltdown by Thomas Woods insists, contrary to the evidence, that the artificially induced boom resulted in a lengthening of the capital structure through overinvestment in too many “long-term projects.” [p. 68]...)What is Woods doing other than applying ABCT? How should Woods have described the business cycle using ABCT without stating how ABCT played a role?
I am really trying to get you here, are you stating that ABCT is not religion, but if someone applies it to a situation it is?
Are we to lock up ABCT in a vault and somehow decide who is using it "in a religious way" and who is not? Should we do this also with Keynesianism? Trigonometry?
What Palmer and Cowen suggest is that ABCT is a specific theory for the period of the 1930's and that anyone using the theory for any other period is "practicing religion." My guess is that Hayek and Mises would completely disagree with the idea that ABCT is a specific theory for the 1930's, and rather that it is a general theory that can be applied to all central bank inspired boom-bust cycles.
It is this use of ABCT in analysis beyond the 1930's as the indicator to Palmer and Cowen that "religion is being practiced". And so more accurately the Plamer/Cowen view is that ABCT is used as a religion, when it is applied outside the period of the 1930's. It is this type of flushing out of exactly what everyone means that for those who are seeking out truth can better understand the topic.
But, these detailed refinements are not the forum for a blog but for more structured debates.
All this said, despite the nuances to the Palmer/Cowen view of when ABCT becomes religion, or religious practice, there is a greater group of economist, and Krugman comes immediately to mind, that I'm sure have an even more expanded view of when ABCT becomes religion, all this must be debated.
But as I once read a commneter write at a blog post somewhere, having a major debate in blog comments is like debating on pieces of toilet paper.
The debate needs to go on in a more formalized fashion.
This is the first time I have seen this defense made by Palmer of his original comment, and I think there are shifts from his original comment.
ReplyDeleteBut again I think the debate needs a more formal structure than the comments section of a blog.
If Austrian business cycle theory is a "religion," then some of its fundamental analytical components are ones that every economist "worships."
ReplyDeleteFirst, supply and demand. Every economist believes and teaches their student that if price is below market-clearing, or equilibrium," there will be a discrepancy between quantity demanded and quantity supplied of a good.
And every economist and finance professor will tell his students that the discounted present value of any asset or investment will be increased if the rate of interest is lowered. And that, other things held equal, the present value of longer-term assets and investments will increase in value (or price) more than shorter-term assets and investments with any such decrease in the rate of interest.
If this is true, that a monetary expansion that artificially pushes market rates of interest below what would have been (without the monetary expansion and interference), their market-established "clearing" or equilibrium, level must bring about a discrepancy between the quantity demanded for loanable funds for investment purposes and the quantity supplied of people's savings for lending purposes.
This discrepancy (or shortage at an artificially too-low a rate of interest) is "filled" by the central bank with fiat money that is lent to those who wish to borrow that artificially excessive amount of funds for investment purposes.
So the number and types of investment projects undertaken under this situation is in excess of the actual amount of savings that income earners are willing to put aside to lend as a "real" basis to support investment activities with some of the scarce resources of the society.
And, furthermore, since the rate of interest has been artificially lowered in this way due to Fed monetary policy, this, now, tends to increase the present value of longer-term investments to a greater extent than shorter-term investments.
This tends to create a "bias" among borrowers to undertake investment projects that have longer-terms horizons that would have been the case if the rate of interest had remained higher at its market-determined level.
These two ingredients, that virtually every economist would agree with, are the "religious inspirations" for Austrians to conclude that, in general, business cycles are the result of manipulated interest rates that stimulate investment activity in excess of available savings in the economy. And why, in general, these investment projects tend to be of a longer-term nature.
Now, of course, each historical period has its own particular and individual features and characteristics. And the recent bubble phase of the current business cycle is no different.
In this case, Fed agencies such as Fannie Mae and Freddie Mac, were at the same time artificially biasing a large number of these longer-term investments into the home buying market by subsidizing and guaranteeing the uncredit worthy who wished to buy houses at those artificially low rates of interest.
So if home mortgage rates are low along with other interest rates due to Fed monetary expansion and you then couple this with zero down payments, and no job or credit history standards to extend a home loan, then we should not be surprised that a good amount of this fiat money created by the Fed and funneled into the economy through the banking system ends up in created a bubble in the housing market.
Hence, the applicability of the Austrian Theory of the Business Cycle for analyzing and interpreting the general features of the current economic crisis.
Richard Ebeling
Robert, this is much too late, of course, but just fyi, Anonymous is obviously Palmer himself. No one else but the narcissistic Palmer would dwell so lovingly on the details of his argument.
ReplyDelete