Friday, September 16, 2011

An Examination of the Declaration by the Chief Economist at Deutsche Bank that He is an "Austrian in Economics"

The Chief Economist of Deutsche Bank Group, Thomas Mayer, has announced that he is “an Austrian in economics”.

In a new paper released today by Deutsche Bank Research, Mayer says that the Austrian theory of the business cycle describes what we are currently experiencing.

Although, I'm not sure Mayer fully gets Austrian theory. At one point he writes:

In a world where people have imperfect foresight and do not always behave rationally, and markets are not always efficient, we need to accept that economic policy cannot fine-tune the cycle.
The entire idea of Austrian theory is that the business cycle is the result of central bank money manipulation and that there wouldn't be any business cycle without the manipulation. Mayer, on the other hand, says that
All that policy can do is to lean against excessive exuberance and depression duting the cycle and help avoid the excessive swings of risk appetite that we have seen over the last 10 years. 
For the true Austrian, there is nothing to "lean against". Remove central bank money manipulations and the cycle goes away. It is not something that is inherent in economies as Mayer seems to imply.

Mayer also quotes Hayek, but fails to mention the contributions of Ludwig von Mises and Murray Rothbard.

I grew up in Massachusetts and consequently, I don't take anyone as a serious member of  Red Sox Nation, if they can't name the starting line ups for the 1967 Boston Red Sox (before and after Tony Conigliaro was injured). In economics, I really can't consider someone an Austrian, if they are discussing the business cycle and don't bring up the names Mises and Rothard and further don't understand that there is no cycle outside of that caused by central banks.

So yeah, it's fine for someone to buy Austrian Economics caps and sweatshirts and declare themselves part of Austrian Nation, but if they don't know what went down in 1912, you really can't consider them hardcore.

28 comments:

  1. It could be the beginning of an attempt by the establishment to alter the meanings of terms: similar to how conservative and liberal flipped in this country,and how socialist turned into progressive.

    Maybe the establishment wants Austrian and Keynesian to switch, because the masses of the populace will never know the difference.

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  2. Red Sox Nation citizenship: Does playing catch with Ted Williams between innings at Fenway Park, as a kid, qualify?

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  3. "The entire idea of Austrian theory is that the business cycle is the result of central bank money manipulation and that there wouldn't be any business cycle without the manipulation."

    Is this correct?

    The business cycle can certainly appear under fractional reserve banking without central banking. Further, it would seem that in a credit market based on a 100% gold coin standard, we could still see some form of business cycle resulting from a cyclical credit market. If the price of credit risk falls, uneconomic investments will likely be made at the margin. When uneconomic investments are recognized and subsequently liquidated, the price of credit will rise again.

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  4. In my opinion Mayer's piece is very good.

    His analysis is good. Perhaps it is more Schumpeterian/Postkeynesian in some parts. So what?

    I agree with anonymus that there is no reason to believe that there would not be credit cycles without a central bank. Indeed reading Mises (1912) and Hayek (1929) should make this clear.

    Also, he can like the general story for his analysis of data without buying the whole package. Perhaps he likes the credit cycle theory.

    I am happy that Mayer finds Austrian research useful.

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  5. Mises also states that all human action is rational.

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  6. @anon 10:35

    "The business cycle can certainly appear under fractional reserve banking without central banking. Further, it would seem that in a credit market based on a 100% gold coin standard, we could still see some form of business cycle resulting from a cyclical credit market. If the price of credit risk falls, uneconomic investments will likely be made at the margin. When uneconomic investments are recognized and subsequently liquidated, the price of credit will rise again."

    I disagree. A cartel granted by a state enforced monopoly (e.g. a central bank) is needed to coordinate these efforts. Otherwise, market forces/discipline will cause runs on fractional reserve banks and they will not be able to coordinate the kind of credit creation to allow what Austrians refer to as the business cycle to occur

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  7. anon@10:35 while there would be movements depending on demand and supply around the world, there would not be the deluges like the one seen 2001 to 2005 whioh would make the gold level seem flat in comparison.

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  8. Speaking of folks who really understand Austrian Economics, the reason people don't get MMT is because they don't get math. Like Rothbard?

    http://tinyurl.com/3g8fon2

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  9. Danger Pioneer writes:

    "market forces/discipline will cause runs on fractional reserve banks and they will not be able to coordinate the kind of credit creation to allow what Austrians refer to as the business cycle to occur"

    The idea here seems to be that ABCT is a theory of a specific phenomenon - the "Austrian Business Cycle" (ABC), which is defined as the business cycle under central banking. This seems to be either circular or tautologous, and certainly muddies the waters.

    I'm very sympathetic to the view that fractional reserve banking is intrinsically unstable, and exacerbates, if not causes the business cycle (in the ordinary sense). However, I don't see that fractional reserve banking will necessarily be eliminated completely without central banking, i.e. a government cartel. Some fractional reserve banks will go under, certainly, maybe all will go under eventually, but that doesn't mean that fractional reserve banking as such will disappear, since new banks can be formed.

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  10. ABCT, biz cycle culprits in order of importance:

    1 fiat currency system
    2 Central banks
    3 fractional reserve banking

    The cycle is caused by credit expansion. The market puts limits on nº3. With nº 2 some limits are removed. With nº 1 almost all limits are removed.

    FMS

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  11. Man that report is full of bullshit! "failure of the liquidationists in the 1930s.. blah, blah"
    This man has never read Rothbard or Mises.

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  12. Robert, you are being far too kind on this Mayer guy. He is not just not "hardcore" he is truly clueless. He might have read a bit of Hayek, at the most. Probably on wikipedia.

    This is the mainstream neoclassicals trying to ride the "austrian is cool" wave. (I never thought I would ever have reasons to say that)

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  13. @anon 1138

    My point wasnt that frac reserve couldnt/wouldnt exist. It was that withouth a cartel granted a state enforced monopoly, the coordinated credit creation would not occur in the market

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  14. I like Rothbard, Bastiat etc...however I don't liek that some austrians say there would be "no business cycle" without central banking or governemnt monopolies on currency creation. I do strongly believe the government amplifies business cycles with their monetary creation and other bad policies...but things like weather patterns(sunspots)...animal stocks(foxes and rabbits are a classic example) etc have been cycling on and off since humankind startd. Even a pure anarchy banking system would have various degrees of fractional reserves with the most fraudulent banks going bankrupt every once in a while. It is oversellign to say that ALL biz cycles would be eliminated if we finally had free markets.

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  15. You guys should understand that he does not say that "I am an Austrian Economist". He says I am Austrian in economics.

    Perhaps he simply likes the implications or general points that AE stresses: uncertainty, ignorance, credit boom via too low rates, knowledge problem of policy makers, you have to learn from your mistakes --> incentives. These central ideas in AE are all in the text.

    He does not have to be in line with everything. He does not have to favor the same methods.

    The business letter is sent out to all clients. So they will all see this and might all consider to take a look at Hayek et al.. This is a great advertisement for the school. And it is nice that he finds A ideas interesting.

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  16. No Bob, its because no one is interest in old mutton dressed as lamb.

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  17. Anon @10:35 and 11:58,

    You are both correct.

    Danger Pioneer,

    "My point wasnt that frac reserve couldnt/wouldnt exist. It was that withouth a cartel granted a state enforced monopoly, the coordinated credit creation would not occur in the market"

    If fractional reserve banking exists, then the credit creation (bank credit) has already occurred. There is no coordination needed. If the bank credit makes its way to investment in capital goods then the boom will begin.

    It is true that Central Banking allows for much more violent cycles, but it does not follow that absent Central Banking the cycle would not occur.

    My biggest gripe with Ron Paul is that he constantly bashes the Fed and central banking and points to inflation (money creation) as the cause of the business cycle.

    This is incorrect and this view is easily demolished by Neo-Keynesians, Monetarists, and Free-Bankers.

    The business cycle is caused by fractional-reserve credit (fraud) which is invested into capital goods.

    Anon @3:08,

    "things like weather patterns(sunspots)... animal stocks(foxes and rabbits are a classic example) etc have been cycling on and off... It is oversellign to say that ALL biz cycles would be eliminated if we finally had free markets."

    Do not confuse nature cycles with man-made cycles. Business cycles are the result of fraud and by definition impossible in the free-market. This is not to say that fluctuations will not occur due to imperfect knowledge of the future and natural disasters. The free-market is not perfect. It is, however, free from involuntary exchange.

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  18. man is nature. nature is man.

    Cycles occur in both...Many of the worst cycles we are now experiencing are due to governments and central banks messing with the money supply and enforcing various monopolies. However the promise of eliminating cycles is as silly as the promise to eliminate risk.

    I'm no "animal spirits" peddler, but people do get bad ideas that become popular sometimes....and sometimes nature has to run it's course before the bad ideas are proven to be bad.

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  19. next you'll be saying that "cycles" will be eliminated only occasional "soft patches".

    If I could push a button and End the Fed I would do so immediately, however it's a little bit silly to start promising things like the elimination of all cycles.

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  20. Great comments on this thread.

    The Biz Cycle wouldn't completely disappear under anarchy, but it would be almost invisible. Frac Rsrv banks would exist, paying higher interest (for risk) and some currencies (since anything could be commodified and converted to currency- your ownership of a pig could could commodified and used as a payment) could still suffer, but the COORDINATED biz cycle- the bete noir of ABCT, would be gone.

    Agree this guy is a poseur, but he gets points for mentioning ABCT, even if just to expose some to Hayek.

    Dale Fitz

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  21. Dale,

    The business cycle and frb can not exist in anarchy.

    Anarchy means "without ruler." If all people are without a ruler then all exchanges must be voluntary. If all exchanges are voluntary then there can be no fraud. If there is no fraud then there can be no fractional reserve credit. If there is no frc there can be no business cycle.

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  22. Anon,

    " however it's a little bit silly to start promising things like the elimination of all cycles."

    It's not silly at all.

    I did not say that I believe it is likely that a purely free market (the elimination of all fraud, murder, theft, etc) will ever exist. What I said was that given a certain set of conditions (the pure free market) the business cycle (widespread entreprenual error) can not occur.

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  23. Zach, I kinda agree about FRB since they can only exist when a firm is allowed to create credit, based on deposits, and determined by willingness of depositors (and borrowers) to accept certain terms...hmmmmm, the more I think, the more I think anarchistic FRB could exist. If someone will accept my credit, based on the terms and rep of my "bank", then the fact that they don't have enough money to cover any immediate demand would not prevent someone from selling me a product provided they knew they would eventually get their gold.

    Damn, even after years of study, sometimes these things get tricky. Maybe we just need to clarify terms.

    As long as a central bank exists, all bets are off. Anarchy wouldn't eliminate the biz cycle (even smart businessmen make bad decisions, and the herd instinct is powerful) but elimination of gov't control would certainly mitigate it to the point of irrelevance to the larger economy.

    If I'm totally off on FRB, please feel free to correct me. I respect your brain...and that's a handsome profile picture too!

    Dale Fitz

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  24. Well, with a 100% goldstandard we would be living like back in the middle ages. What money is has continuously changed.

    People trade goods for future goods. Why not in money terms? What is the problem?

    Financial deepening has brought all the wealth to the western world. Before derivates and banking developed the US was considered an underdeveloped country.

    Also, you are all aware that the money you deposit is lent out. This is the contract. That is why you get an interest rate from the bank.
    Why else should you? If you want to store your savings in form of gold and prevent anyone to lend it out you are free to do so. Simply ask for a safe and they will offer you one for a the lowest price possible in the market.

    Most people CHOOSE not to do this.

    The business cycle certainly does not hinge on the existence of a central bank.

    If the world was so easy, it would not be complex as Austrians always argue. Then policy makers would not face a knowledge problem. But according to many internet liberatrians the KP seems to only affect policy makers and well published established economists, never Rothbard, Hayek or Mises.

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  25. Zach said: What I said was that given a certain set of conditions (the pure free market) the business cycle (widespread entreprenual error) can not occur.

    This is clearly wrong. Cycles already appear in very simple systems. Nature is full of cycles. As a simple example, have a look at the predator-prey-model (http://www.scholarpedia.org/article/Predator-prey_model). There will always be cycles. For example, you can't outlaw winter. There will always be seasonal cycles. Claiming that we can somehow eliminate all forms of business cycles is utterly silly.

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  26. @anon 5:45am

    What you have described is not fractional reserve lending; or, at least you are missing some key components to what you describe for it to become fractional reserve credit.

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  27. Dale,

    I had this same discussion with Taylor Conant a few weeks ago and I agree that it does get confusing. The problem with FRB is that even if the depositor, creditor, and creditee all agree on a contract where the depositor controls his $1000 deposit and the creditor loans out $900 (10% reserve) then you have agreed to something that is impossible.

    The depositor is still acting on the market as if he has $1000. The creditee is acting on the market as if he has $900. But this can not be true because there was only a $1000 deposit. If the depositor goes to the grocery store and uses his debit card and tries to buy $101 of groceries, he is committing fraud, because there is in truth only $100 available in his checking account.

    In summary, FRB can not exist in the free-market because even if the depositor voluntarily agrees to it there will eventually be a recipient of this FRC (fractional reserve credit) that tries to claim these funds that do not exist. It is this third-party that is frauded and this is when the bust sets in.

    Also the FRB contract is invalid because it is an impossibility for two people to have control of the same good at the same time.

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