Wednesday, June 8, 2011

Roger W. Garrison on the Austrian Business Cycle Theory (ABCT)

Roger W. Garrison is one of the leading Austrian macroeconomists, and he is himself the author of Time and Money: The Macroeconomics of Capital Structure (Routledge, London, 2002), and one of the leading exponents of ABCT.

Here he is giving a useful lecture on ABCT at the Mises Institute. And all the flaws of ABCT are on display: the underlying assumption of full employment, the mythical Wicksellian monetary equilibrium analysis and the fable of the natural rate of interest (equilibrium interest rate).





Terminology

Roundaboutness
Production of capital goods in the production process of consumer commodities is seen as a type of “production detour.” This is the average period of production, where resources are diverted from direct production of consumer goods to production of capital goods. When new investment occurs beyond replacement of old capital, this leads to a new detour (or concertina effect).

Equilibrium interest rate
The market clearing interest rate where supply in loanable funds equals demand for credit. This is essentially Wicksell’s natural rate of interest, and is supposed to be the interest rate where money supply is neutral and does not cause inflation.

Hayekian pyramid
An inverted pyramid used by Hayek to model the structure of an economy. When investment occurs in new capital goods, the resources directed to lower stages of production where consumer goods are produced are diverted to higher stages of production. This causes inflation in the prices of consumer goods as fewer consumer goods are produced.

54 comments:

  1. This seems to be a fairly comprehensive outline of the errors in Austrian Business Cycle Theory - not that I read german.

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  2. Lord Keynes,

    do you have some sort of definitive "Austrian critique" post up which lays out all the faults with Austrianism? A sort of 'handbook' of Austrian critique?

    In other words, I'm looking for a source for reference when I run into a loud-mouthed Gold-worshiping pop-Austrian on the internet who is convinced that Rothbard was the second coming of Christ and anything other than Austrianism is equivalent to socialism.

    Thanks very much.

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  3. Wicksells Cumulative Process and his Critique of Says law on New school edu
    http://homepage.newschool.edu/~het/essays/money/cumulative.htm
    While Austrian School remained close to Wicksell early work wich he himself have high degree had leaved behind in later years,J.M Keynes and Stockholm school developed his ideas further,and many in the post-Keynsian and Stockholm school tradition made contributions in he field of Non-equilibrium_economic.
    http://en.wikipedia.org/wiki/Stockholm_school_(economics)
    http://en.wikipedia.org/wiki/Non-equilibrium_economics

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  4. "I run into a loud-mouthed Gold-worshiping pop-Austrian on the internet who is convinced that Rothbard was the second coming of Christ and anything other than Austrianism is equivalent to socialism.

    LOL.. well, it is unlikely that those sort of people are amenable to rational discussion, but I can give you links to my various posts where I provide critiques of various Austrian theories.

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  5. Thank you Lord Keynes for a real good blog and
    interesting expose of thought from a Post-Keynsian perspective.What surpice me though is that not the usual hord of huns with teenagers that visit
    von Mises Intitute chatroom drown you with stupid comments with reading advise and circle reasoning,that could tire the most tolerant person to pieces.Here is Keynsian,Michael Hogan,in New Jersey that made the mistake to explain fiscal and monetary policy from Keynsian perspective.He graduadeted from City College New York and worked as economist for 40 years,but got advise to read Henry Hazlitt
    Economics in One Lesson and such.But he answered with a video named Austrian School Disredited:http://www.youtube.com/watch?v=CaJKWCGVVcg i think you may enjoy it.Keep up the good work and thanks!

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  6. This is mind-blowingly hilarious. You mentioned 3 terms, right?

    Roundaboutness
    Equilibrium interest rate
    Hayekian pyramid

    What's amazing is how horribly wrong you got all 3. This means that you have absolutely no clue as to what ABCT is, all the more so what Hayek's formulation of ABCT is.

    What's even more hilarious is Robert giving his approval to your listing and definition of terminologies. That shows that he has no clue either.

    A perfect, real-life example of the age-old story of 'The five blind men and the elephant'. So, is the elephant a pillar or a hose-pipe?

    ROFLMAO

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  7. Talk is cheap.

    Define an "equilibrium interest rate," if think the definiton above is wrong.

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  8. "Talk is cheap."

    True. And you are proof of that.

    "Define an "equilibrium interest rate," if think the definiton above is wrong."

    I don't owe you an education. All I will say is that the way you have defined natural interest rate as used in ABCT is not what it is. Go figure it out for yourself.

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  9. LOL.. in other words, you have no evidence to back up your statement that the definition is wrong.

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  10. By the way, here is Garrison:

    "The supply and demand for loanable funds, as shown in Figure 3.1, identify a market-clearing, or equilibrium, rate of interest ..., at which saving (S) and investment (I) are brought into equality"

    Garrison, R. W. 2000. Time and Money: The Macroeconomics of Capital Structure, Routledge, London and New York. p. 39.

    On that same page he makes it clear that this rate is essentially the Wicksellian rate causing intertemporal equilibrium.

    Exactly what I say above. It's looks like you're talking garbage, as usual.

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  11. Hey LK,

    Before you jump up and down, please explain this bit.

    "is supposed to be the interest rate where money supply is neutral and does not cause inflation."

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  12. Easy:

    “Hayek’s teacher, Ludwig von Mises, was one of those who took up Wicksell’s theory, emphasizing the way in which a low rate of interest, set by the banking system below the natural rate of interest, would cause investment to exceed saving ....
    However, whereas Wicksell had seen this simply as a theory of inflation in a credit-money economy, Mises transformed it into a theory of the cycle. If saving was too low, consumption must be too high, implying that, at some point, the stock of consumption goods must become exhausted; the price of consumption goods would then rise, bringing the expansion to an end. What was needed for stability was a policy of ‘neutral’ money. However, the concept of neutral money posed a serious problem of definition. The natural rate could be defined in three ways: (1) as the rate at which savings and investment are equal and therefore no new money is created; (2) as the rate of interest at which prices are constant (no inflation); or (3) as the rate of interest that corresponds to the productivity of real (physical) capital goods.”


    Blackhouse, R. E. 2006 "Hayek on Money and the Business Cycle," in E. Feser (ed.), The Cambridge Companion to Hayek, Cambridge University Press, Cambridge, UK. p. 37.

    Clear??

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  13. "Clear??"

    Clear, but whose comments are these? Mises? Hayek?

    "If saving was too low, consumption must be too high, implying that, at some point, the stock of consumption goods must become exhausted; the price of consumption goods would then rise, bringing the expansion to an end."

    Did Mises or Hayek say this?

    "What was needed for stability was a policy of ‘neutral’ money."

    Once again, did Mises or Hayek say this?

    "The natural rate could be defined in three ways: (1) as the rate at which savings and investment are equal and therefore no new money is created"

    For the third time, did Mises or Hayek say this or is someone attempting to interpret either of them?

    "as the rate of interest at which prices are constant (no inflation)"

    For the fourth time, did Mises or Hayek say this? I ask this specifically because I don't recall either of them calling rising prices as inflation.

    "as the rate of interest that corresponds to the productivity of real (physical) capital goods."

    For the fifth and final time, did Mises or Hayek say this? I ask this one specifically because Mises was most explicit in rejecting 'productivity of physical capital goods' as the basis of defining the very concept 'interest', leave alone the concept 'natural rate of interest'.

    My knowledge and understanding says that the answer to all these questions is a big, unqualified NO!!! That further means that the interpretation you have given is not an Austrian interpretation. In which case, my charge that you have not understood the Austrian position stands.

    p.s. A person making self-proclamations to be an Austrian or who you declare as an Austrian does not qualify as an Austrian economist.

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  14. "is supposed to be the interest rate where money supply is neutral and does not cause inflation."

    This statement in particular is highly suspect because no Austrian worth his salt would say 'money supply is neutral and does not CAUSE inflation' because the Austrian position is that money supply increase IS inflation.

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  15. "is supposed to be the interest rate where money supply is neutral and does not cause inflation."

    This is sentence. I am using "inflation" in the sense price inflation here. Let me get this clear: you're complaining that in making my statement above I should use the word inflation in its old sense, as an increase in the money supply.
    Let's move on from this complete and utter idiocy...

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  16. “The natural rate could be defined in three ways: (1) as the rate at which savings and investment are equal and therefore no new money is created"

    For the third time, did Mises or Hayek say this or is someone attempting to interpret either of them?”


    Hayek:

    Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks. Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices; if they raise the money rate above the equilibrium rate—a case of less practical importance—they exert a depressing influence on prices.

    Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 215

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  17. "Let me get this clear: you're complaining that in making my statement above I should use the word inflation in its old sense, as an increase in the money supply."

    No. I am complaining that the position that inflation is a steady rise in prices is NOT an Austrian position and hence that your including it as part of the way inflation is treated in ABCT is fundamentally incorrect.

    That is just to say that (as usual) you have either failed or refused to understand ABCT before criticising it or are deliberately creating a straw-man in order to claim victory.

    "Let's move on from this complete and utter idiocy..."

    Why is it complete and utter idiocy to insist that inflation should be used to refer to an increase in the money supply? Why should we 'move on' from that position? Is it your position that it is a meaningless and untenable position? Or is it your wish to deliberately misuse terms so as to misrepresent the opponent's position?

    I suspect it is the last. So typical of a whatever-Keynesian.

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  18. Good quote from Hayek. Note that

    "the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them."

    is very, very different from saying

    "the interest rate where money supply is neutral and does not cause inflation".

    The next part gets even better

    "When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices;"

    So, Hayek very clearly lays it out that it is the increase in money supply, which is an inevitable counterpart of any attempt to depress interest rates, is the reason for price rise (price inflation).

    So, as usual, you have mangled Hayek beyond recognition. Thanks for showing me that I have understood Mises and Hayek right.

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  19. "as the rate at which savings and investment are equal and therefore no new money is created"

    The problem is with the "therefore". You shouldn't be using it. It is new money creation that makes it possible for investment to exceed savings. The causality works the other way.

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  20. Regarding neutral money that was one of Hayek’s ORIGINAL ideas in developing the trade cycle theory and presents his case for neutral money in a 1928 essay:

    Hayek, F. A. von, 1928. “Das Intertemporale Gleichgewichtssystem der Preise und die Bewegungen des Geldwertes,” Weltwirtschaftliches Archiv 2: 33–76.

    As late as 1933, he was still urging the idea of making money neutral though not as optimistic:

    Hayek, F. A. von, “√úber ‘neutrales Geld,’” Zeitschrift fur National√∂konomie 4 (1933): 659-661, translated in F. A. von Hayek, Money, Capital & Fluctuations: Early Essays (ed. R. McCloughry), Routledge & Kegan Paul, London.

    Then he had came up against the critique of Sraffa by the time of 2nd edition of
    Prices and Production (2nd edn; Routledge and Kegan Paul, 1935) and he was starting distance himself from it, and admitting it was not a practical monetary policy.

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  21. "That is just to say that (as usual) you have either failed or refused to understand ABCT before criticising it or are deliberately creating a straw-man in order to claim victory."

    There is no "failure" and "criticism" is laughably stupid. I have known for a long time that Austrians use "inflation" in the sense of increases in the money supply:

    http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html

    I, however, am not an Austrian and am not committed to using thr term in that sense.

    My use of it above is in the sense of price inflation, and the defintion of the "Equilibrium interest rate' as the "market clearing interest rate where supply in loanable funds equals demand for credit. This is essentially Wicksell’s natural rate of interest, and is supposed to be the interest rate where money supply is neutral and does not cause [price] inflation" is correct.

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  22. LK,

    Even if all this is accepted, there us still a critical element of the Austrian position that is missing in your story of interest rate - credit expansion that necessarily accompanies interest rate depression, is the other side of monetary inflation and is the cause of the malinvestment that ABCT explains.

    By omitting credit expansion, you are presenting a straw-man version of ABCT. It is the expansion of credit beyond the available pool of savings that causes the inflationary boom. Why do you ignore that?

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  23. "It is the expansion of credit beyond the available pool of savings that causes the inflationary boom. Why do you ignore that?

    Ignore it? Where? Here?? This is just a quick summary of ABCT to accompany the video.

    I've dealt with the issue of the alleged "expansion of credit beyond the available pool of savings" before. What is the flaw here? It assumes a system of loans made in natura in an economy at full employment with no significant idle resources. It ignores the role of international trade in obtaining additional resources:

    "Wicksellian monetary equilibrium assumes an economy running at full employment: but in reality capitalist systems have historically had many periods when they are mired in underemployment disequilibria, or movements from one underemployment equilibrium to another, where there are significant idle resources, like labour, raw materials, capital goods and other factor inputs. If an economy with significant idle resources has investment via fractional reserve banking or central bank creation of excess reserves (without prior saving in loanable funds), how will the inflationary pressures imagined by ABCT happen if productive resources simply do not need to be freed in the stages close to consumption? Such factor inputs will be available or quickly made available through increasing capacity utilization in the relevant industries, or even imported from overseas."

    http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-various.html

    And even if the economy is running at full employment and NO additional factor inputs are available, there is no unique natural rate of interest in (1) a money-using growing economy or (2) in a growing barter economy. It's just back to Sraffa's criqitue of Hayek.

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  24. "What is the flaw here? It assumes a system of loans made in natura in an economy at full employment with no significant idle resources. It ignores the role of international trade in obtaining additional resources:"

    Completely off the mark and shows that you just haven't understood ABCT, especially Hayek's formulation before criticising it. Full/under employment or 'obtaining' resources through international trade have absolutely no role in business cycle creation. That is done by inter-temporal discoordination caused by the combination of credit expansion and monetary inflation unleashed by a policy of depressing interest rates below the level demanded by a non-expansionary credit system.

    Simply put, savings presupposes and implies the forsaking current consumption in favour of future consumption. This forsaking results in an injection of capital into the production system increasing the gross savings that are pumped into the production system. Using the exact numbers used by Hayek in Prices and Production,

    A production system geared to produce 40 units worth of consumer goods has a gross savings of 80 across all (4) stages of the production structure (32, 24, 16 and 8). When consumers (based on their time preference) forsake 10 units of consumption today and offer that savings as capital for investment, that drives the gross capital in the system from 80 to 90. However, gross capital is just the sum total of the factor payments across the entire structure of production. In simple geometric terms, it may be visualised as the area of the triangle. So if the base of the triangle drops from 40 to 30 but the area of the triangle has to go up from 80 to 90, it necessarily requires the altitude of the triangle to increase in the ratio 3:2. In simpler terms, the number of stages in the production system will have to increase from 4 to 6, thus lengthening the production structure.

    Now, when this lengthening is carried out through real savings (forsaking of present consumption),it puts downward pressure on the prices of consumers' goods through 2 routes. The first is the decreased demand for consumers' goos today. The second is the increased production of consumers' goods made possible by a more roundabout method of production that necessarily involves more division of labour and specialisation. This downward pressure on prices is transmitted through the production structure through the process that imputes prices of factors backwards from the prices of the consumers' goods and pushes them too backwards. However, as Hayek shows, the effects of this is not uniform throughout the production structure. It depresses factor incomes in less remote stages of production and improves factor incomes in more remote stages of production. This is the aspect that causes movement of factors from less productive less remote stages of production to more productive more remote stages of production.

    Most importantly, when the increased production of consumers' goods (as against 30) hits the market (at lowered prices) consumers are ready to spend at that point in time because it is in sync with their time preference as expressed by their savings. This is the intertemporal coordination brought about by injection of genuine savings.

    (contd.)

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  25. (contd.)

    The same lengthening of the production structure may be achieved by injecting 40 units of expanded credit (without genuine savings) accompanied by the creation of 40 units of money. However, the consequences of doing so are many and adverse. Firstly, it raises the prices of factors of production in remoter stages of production without any real savings (more money chasing the same factors of production and bidding it away). Secondly, as the money ripples through the production system and reaches the hands of the owners of the original means of production, it drives consumers' prices up rather than down. Thirdly, as consumers have not really saved capital for future consumption, when the increased production hits the market at prices inflated by money creation, consumers are not ready for them, creating the intertemporal discoordination that you call the bust stage or the depression.

    It has nothing at all to do with the availability of un/under-employed factors in the production system. It has nothing whatsoever to do with bringing in factors through international trade. Your objections on those grounds are utterly meaningless and do nothing to address the main point of ABCT.

    And Sraffa's objection is disposed of in one word - ARBITRAGE. Sraffa did not know what he was criticising. His criticism was the criticism of an ignorant man working on a foundation of a mountain of fallacies.

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  26. The idiocy in your explanation is to focus exclusively on the inflationary effect of credit expansion through money creation while completely ignoring the effect on gross savings. That in turn is a result of the complete lack of a theory of capital. So typical of whatever-Keynesians.

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  27. "However, the consequences of doing so are many and adverse. Firstly, it raises the prices of factors of production in remoter stages of production without any real savings"

    By refering to "real savings" and "more money chasing the same factors of production and bidding it away", you have completely confirmed my statmeent that Hayek's theory assumes "loans made in natura in an economy at full employment with no significant idle resources."

    There is nothing here to refute anything I have written.

    In a letter written to John Hikcs in 1967, Hayek confirms that his theory requires the assuption of full employment at the beginning of the process:

    Hicks to Hayek, November 27, 1967
    ...
    We have (a) full employment, (b) static expectations, (c) 'equilibrium' at every stage, so that demand = supply in every market, prices being determined by current demand and supply. Add to these the Wicksell assumption, of a pure credit economy and we clearly find that if there were in lags, the market rate of interest cannot be reduced below the natural rate in an equilibrium position; ...


    Friedrich August Hayek, Good money, Volume 6, p. 100.

    Hayek to Hicks, December 2, 1967
    ... I accept assuption (a), full employment ....

    Friedrich August Hayek, Good money, Volume 6, p. 102.

    Moreover:

    "Hayek surveyed but found inadequate the then existing theories of the trade cycle in his Monetary Theory and the Trade Cycle (129/1933) ....
    The economy in Prices and Production started at full employment and then for some reason or another a gap opened up between the natural and actual rate of interest. Hayek took a lowering of the actual rate of interest at which the banks offered loans to be the initial 'shock.' This led to the initiation of projects with a longer period of production than hitherto feasible. But due to full employment this leads to a wage explosion as workers are bid away from their old jobs to the new 'production line' ...

    Alvaro Cencini, Inflation and unemployment: contributions to a new macroeconomic approach, p. 132.

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  28. "Clearly, the assumption that the experiment began at full employment was crucial to Hayek's conclusion that credit creation would divert resources from consumption to investment, ... ."

    David E. W. Laidler, Fabricating the Keynesian revolution, p. 39ff.

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  29. In Monetary Theory and the Trade Cycle (1929/1933), Hayek makes it perfectly clear full meployment equilibrium is his starting point:

    "The purpose of the foregoing chapter was to show that only the assumption of primary monetary changes can fulfill the fundamentally
    necessary condition of any theoretical explanation of cyclical fluctuations—a condition not fulfilled by any theory
    based exclusively on “real” processes. If this is true then at the outset of theoretical exposition, those monetary processes must be recognized as decisive causes. For we can gain a theoretically
    unexceptionable explanation of complex phenomena only by first assuming the full activity of the elementary economic interconnections as shown by the equilibrium theory, and then introducing, consciously
    and successively, just those elements that are capable of relaxing these rigid interrelationships."

    Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 47.

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  30. "you have completely confirmed my statmeent that Hayek's theory assumes "loans made in natura in an economy at full employment with no significant idle resources.""

    This does nothing to address the more fundamental issue of intertemporal discoordination introduced by credit injection through credit expansion and monetary inflation, which incidentally is the main point of ABCT.

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  31. "credit creation would divert resources from consumption to investment"

    Where on earth did this whatever-Keynesian pull this out from? To the best of my knowledge, Hayek's ABCT does not talk of diverting resources from consumption to investment but rather of making investment possible without prior forsaking of consumption, i.e., saving.

    Thus, it seems completely irrelevant.

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  32. "This does nothing to address the more fundamental issue of intertemporal discoordination introduced by credit injection through credit expansion and monetary inflation,"

    The assumption of full employment (with no significant idle resources) with loans made as if there were carried out in natura is a precondition for this "intertemporal discoordination introduced by credit injection" to even work.

    If there are no real world starting assumptions that are true, then no "intertemporal discoordination introduced by credit injection" will occur.

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  33. "The assumption of full employment (with no significant idle resources) with loans made as if there were carried out in natura is a precondition for this "intertemporal discoordination introduced by credit injection" to even work. "

    Wrong. Injection of credit, whether through genuine savings or expanded credit into the production system leads to investments whether or not resources are fully employed. The capital is not going to sit around twiddling thumbs. Further, as in the example I have shown (Hayek's own), adding 10 units of savings expands the gross savings to 90 units from 80 units while adding 40 units of expanded credit expands the gross savings in the production system from 80 units to 120 units. This is not influenced by whether or not resources are fully employed or not.

    Failing to understand this indicates a failure to understand that a production system requires a certain sustained gross saving by capitalists in order for it to produce a certain level of output of consumers' goods on a sustained basis.

    And when the credit injection I spoke of earlier is not funded by genuine savings, it will end up producing goods that do not have buyers unless you now expand credit to those very buyers. This intertemporal discoordination is not influenced by the level of employment of resources. You need to explain how it may be influenced.

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  34. "The assumption of full employment (with no significant idle resources) with loans made as if there were carried out in natura is a precondition for this "intertemporal discoordination introduced by credit injection" to even work."

    Let me make it simpler. Please explain why it IS a precondition.

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  35. "Injection of credit, whether through genuine savings or expanded credit into the production system leads to investments whether or not resources are fully employed."

    I have already told you above, if realresources are availble, the
    inflationary presuures don't occur.

    What if the factor inputs are just imported?

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  36. "I have already told you above, if realresources are availble, the
    inflationary presuures don't occur.

    What if the factor inputs are just imported?"

    It is not just about the inflationary pressures. It is about producing goods which people are not ready to buy. It is about intertemporal discoordination. That is not influenced by existence idle resources.

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  37. "Injection of credit, whether through genuine savings or expanded credit into the production system leads to investments whether or not resources are fully employed."

    In investment in what sense? In capital goods?
    Not even necessarily true.
    It is entirely possible for credit to flow to consumers to (1) purchase consumer goods or (2) speculate on asset prices.

    "And when the credit injection I spoke of earlier is not funded by genuine savings, it will end up producing goods that do not have buyers unless you now expand credit to those very buyers. "

    This is total unadulterared rubbish: the broad money stocks of most countries are much higher than the mere agregate value of factor paymets from production. Why?

    Because of lots of moeny is held idle, people have savings, and money can be diverted back into consumption spending form being idle.

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  38. "I have already told you above, if realresources are availble, the
    inflationary presuures don't occur."

    Further, the point about prices is not just prices rising. It is about prices being higher than they would have been in the absence of the inflation (money supply increase). For instance, if genuine savings had happened, factor prices would have fallen because demand for consumers' goods would have fallen as a result of the forsaking of consumption. Injection of capital prevents this price fall from happening. To Austrians, that is significant. To you, only rising prices is inflation. That is the reason we are talking past each other.

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  39. Also you ignore the velocity of circulation of money. In a booming economy, velocity of circulation of money increases, as is well known from any number of empirical studies: there are more transactions, and more purchases.

    ReplyDelete
  40. "This is total unadulterared rubbish:"

    You are the one talking rot. You need to explain how when credit is injected into the production system as loans to producers, it does not lead to investments in production.

    ReplyDelete
  41. "Also you ignore the velocity of circulation of money."

    Yes. I ignore it because it is a nonsensical concept.

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  42. "Because of lots of moeny is held idle"

    Idle money is a nonsensical concept as I have explained before. There is no such thing as idle money.

    ReplyDelete
  43. "Idle money is a nonsensical concept as I have explained before. "

    It's a very meaningful and real world concept and phenomenon.

    ReplyDelete
  44. And I'll ask again:

    What if the factor inputs are just imported?

    ReplyDelete
  45. "Because of lots of moeny is held idle, people have savings"

    Nonsense. If credit is expanded beyond the available pool of savings, it is absolute garbage to say that these very people have savings. If they had, why did credit have to be expanded in the first place?

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  46. "What if the factor inputs are just imported?"

    I'll reply again. It is irrelevant to intertemporal discoordination.

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  47. "If credit is expanded beyond the available pool of savings, it is absolute garbage to say that these very people have savings."

    Because I have just said a great deal of "savings" can take the form of idle money: money withdrawn from making commodity purchases. Money held for the speculative and precautionary motives. Money being used to speculate on the financial and real assets on secondary markets.

    Again, your model of the economy underlying all this is ridiculously simplistic and does not describe the real world.

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  48. "Because I have just said a great deal of "savings" can take the form of idle money: money withdrawn from making commodity purchases. Money held for the speculative and precautionary motives. Money being used to speculate on the financial and real assets on secondary markets."

    Nonsense. All this is money performing a function and is not idle except in warped whatever-Keynesian half-minds.

    Further, you still need to explain how if credit is expanded as loans to producers, it does not go into investments in production.

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  49. "Again, your model of the economy underlying all this is ridiculously simplistic and does not describe the real world."

    And your concepts are so ridiculously flawed that they don't stand up to scrutiny.

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  50. "Because I have just said a great deal of "savings" can take the form of idle money:"

    Hey genius, Austrians do not called cash in hand as savings. They call it 'cash balances'.

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  51. Also, you already have Hayek himself telling what conditions are necessary for his theory to work.

    In a letter written to John Hicks in 1967, Hayek confirms that his theory requires the assuption of full employment at the beginning of the process:

    Hicks to Hayek, November 27, 1967
    ...
    We have (a) full employment, (b) static expectations, (c) 'equilibrium' at every stage, so that demand = supply in every market, prices being determined by current demand and supply. Add to these the Wicksell assumption, of a pure credit economy and we clearly find that if there were in lags, the market rate of interest cannot be reduced below the natural rate in an equilibrium position; ...

    Friedrich August Hayek, Good money, Volume 6, p. 100.

    Hayek to Hicks, December 2, 1967
    ... I accept assumption (a), full employment ....

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  52. "you still need to explain how if credit is expanded as loans to producers, it does not go into investments in production. "

    = Straw man.
    Yes if money is lent to producers, it will in normal circumstances go to capital goods investment.
    But in fact a lot of credit these days goes to consumers to (1) purchase consumer goods or (2) speculate on asset prices.

    Rothbard says:

    "To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur."
    Rothbard, M. N. 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala. p. 995–996, n. 110.

    Therefore you already have a theoretical scenario in which credit could flow to consumers and the cycle effects would not occur.

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  53. Yet more problems identified by Kirzner:

    AEN: You’ve never thought of providing a systematic critique of the Austrian business cycle theory, for instance?

    KIRZNER: No, I’ve never had too much interest in the Austrian business cycle theory. I’ve never felt that the Hayekian business cycle theory was essentially Austrian. In fact, Mises, who was the originator of this whole idea in 1912, didn’t see it as particularly Austrian either. There are passages where he notes that people call it the Austrian theory, but he says it’s not really Austrian. It goes back to the Currency School and Knut Wicksell. It’s certainly not historically Austrian. Further, I would claim that, as developed by Hayek, there are many aspects of it that are non-Austrian. I don’t believe that to be an Austrian you have to buy into the Hayekian view of business cycles. …..

    AEN: And the rest of the theory?

    KIRZNER: Otherwise, the Austrian theory of the business cycle is a macro theory. It’s an equilibrium theory. And it treats capital in an objective sense rather than a subjective sense. It treats time as somehow embedded in the capital goods themselves. So I’ve always had a certain reserve about that particular theory, however brilliant it may be. I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912.”
    .
    “An Interview with Israel M. Kirzner,” Austrian Economics Newsletter (vol. 17.1, 1997).

    http://mises.org/journals/aen/aen17_1_1.asp

    You have yet another problem:

    ABCT "treats capital in an objective sense rather than a subjective sense".

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  54. "= Straw man."

    Nonsense. Hayek's formulation of ABCT was fundamentally or rather completely about the effects of credit injection into the production system through real savings as against through credit expansion, monetary inflation and interest rate depression.

    "You have yet another problem:

    ABCT "treats capital in an objective sense rather than a subjective sense"."

    ROFLMAO. It is you who has a problem. You need to justify this statement.

    ReplyDelete