Wednesday, February 17, 2016

The Limits of Austrian School Business Cycle Theory

By Robert Wenzel

It's time for another segment of Comments on Comments. In this edition, I will focus on comments left at the post, The Merging of Austrian-Lite and Paul Krugman.

But before I get to specific comments, I want to make a general observation. I think one of the problems with those I call Austrian-lite is that they see everything that goes wrong in the economy as the result of Federal Reserve doing.

This is a major error.

The Federal Reserve is the central bank of the United States and its money manipulations do cause the roller-coaster economy and the business cycle, but there is much more to the economy than just the business cycle.

Further, business cycle theory is a theory about a cycle in the economy, specifically a boom and a bust. But note well: It is about both a boom and a bust. There is nothing in Austrian school business cycle theory that suggests a central bank can't reverse a bust because "it has run out of bullets."

ABCT is about the distortions caused by central bank money manipulations directing goods toward the capital goods sector and away from consumption goods. The bust occurs when the economy attempts to readjust funds directed to the capital goods sector back into the consumption sector. Unemployment casued during this readjustmnet period is the only unemployment that is explained by ABCT.

Whatsmore, ABCT is about a "cluster of errors" appearing across the economy, not just in limited sectors. Murray Rothbard made this point clear when he explained the business cycle (empahsis in original);
The explanation of depressions, then, will not be found ny referring to specific or even general fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors?
He also made clear how when the boom ends:
The boom will end when bank credit expansion finally stops. 
Again, this is about the business cycle. There are plenty of other things going on in the economy that have nothing to do with the Federal Reserve or business cycle.  Minimum wage laws can result in unemployment. Obamacare costs that must be footed by employers may result in stagnant wages. Regulations may provide an edge to those already established, thus making it difficult for the less established to achieve great wealth.

These are all problems in the economy, but none of them have anything to do with the Federal Reserve. It is one thing for the masses to hate the Fed and think everything going wrong is a problem caused by the Fed but it is not accuarte.  Presumably the readers here at EPJ are the thinkers in the room, and we need to be more precise about our understanding. The Fed is a problem because it causes the boom-bust cycle, but there is a lot wrong that goes on because of other government interventions. To claim the Fed "has run out of bullets," is simply a complete failure to understand ABCT, the Fed role in it and how the Fed operates.

Now on to the comments.
sonepatchworthFebruary 13, 2016 at 9:30 AMSo are you saying the lack of QE/significant money printing, as we have now, is not enough to end the boom, the boom needs no escalating money printing to continue?
Are you saying the raising of interest rates, as we have now, is not enough to end the boom, the boom can continue despite the ending of artificially low interest rates?
Are you saying mounting excess production in areas lacking expected consumer demand, as we have now, is not enough to end the boom, the boom can continue despite these shortfalls in expected revenue and associated business failures?
You are saying we must first experience capital good price inflation and associated capital shortfalls before the boom can end?
1.Who says the Fed isn't printing enough money now? It looks to me like they are. Over the last 6 months money supply growth (as caluclated by the method I describe in The Fed Flunks)  has climbed from 1.0% to 8.3%.

2.The abolute interest rate number means nothing. It is the rate relative to inflation and supply and demand, that is, the market rate removed of Fed manipulations. An increase of 0.25% by the Fed could actually be an increase from a month earlier in the spread, between the Fed rate and the market rates, if non-manipulated market rates are climbing higher. The increase in money supply suggets that is exactly what is going on now

3.The business cycle boom is about money flows, not about some "excess production." What is "excess production" anyway, are you saying markets don't clear?

Your thinking is so jumbled with Keynesian nonsense, you need a claeansing.

Adam MarxFebruary 13, 2016 at 10:14 AMYoure being incredibly disingenuous here Robert.
"the Austrian-lites hold the difficult to understand view that the Fed can never raise rates"
No free market supporter argues that the Fed can LITERALLY never raise rates. Schiff among others have said they can technically, but by saying "never" they mean that the Fed would pop the bubbles it created and severely damage its reputation and influence.
In fact, it is YOU who is more Keynesian than them by strictly using statistical categories like unemployment and labor participation. Typical Keynesian focus. News flash! Labor is not homogenous, and neither are jobs. The labor markets are so diverse and "choppy" that labor statistics cannot account for a large part of itin a reatively reliable way.
For example: under-the-table work, constantly-changing part-time hours in industries like restaurants and delivery jobs, self-employed jobs that are under reported or unreported, etc.
Also, I never hear you mention when talking about the Fed's assessment of the economy, the fact that both imports AND exports are falling, which a huge sign of.....?
1. So are you saying Fed bubbles will be popped with every hike in rates? That has noting to do with ABCT. What kind of theory is this based on? There are many reasons non-manipulated rates can climb higher by a significant amount, whereby a Fed hike in rates of even 100 basis points wouldn't bust the bubbles.

2.Using the statistical categories unemployment and participation rate are not off limits to Austrians, It is how you use them. Murray Rothbard's America's Great Depression is packed with unemploymnet numbers.

3. "Labor markets are not homogenous." No kidding. Who said they were?  For a business cycle we are talking about a "general cluster of errors" which also happens to mean a general cluster of unemployment.

4. Under-the-table work, part-time hours have much more to do with taxes, Obamcare etc. than the business cycle and the Fed.

5.  What do imports and exports have to do with the business cycle?

CopperHeadFebruary 13, 2016 at 2:29 PMYour theory is as good as the opposite one. Peter Schiff is now considered and 'Austrian-lite"? The Fed in the short to intermediate term have not used up all their bullets so the situation is still not clear.
And just what will cause the Fed to "use up all their bullets"? You get this from Austrian business cycle theory?

 NeilFebruary 14, 2016 at 10:21 AMRobert, I think you're going to end up eating some crow on this one. Any serious stock market analyst worth his salt will tell you behind closed doors that this market is going to drop out of bed fairly soon. I'm talking second quarter 2016 carnage 2008 style, but worse. Do you not notice the ominous problems in the European banking sector now rising to the surface? Deutche Bank is obviously a time bomb in my opinion. The only thing that could potentially prevent this from happening is the Fed surprising the market with a healthy dose of QE and a rate cut at the March meeting. And I think we all know the chances of that happening at this point are slim to none. The Yellen Fed seems to be reactionary not proactive.

1. "Any serious market analyst worth his salt"? Name one, never mind the many you imply.

2. What does Deutche Bank have to do with the US business cycle? Are you saying the entire US economy is at risk anytime you percive a problem at a major  overseas financial institution?

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

No comments:

Post a Comment