Saturday, August 27, 2011

Lachmann on Trade Cycle Models

Chapter VII of Ludwig Lachmann’s Capital and its Structure contains a number of insights into trade cycle theory mostly ignored by modern Austrians:
“By ‘Trade Cycle’ we shall mean nothing more precise than the periodic ups and downs of output, incomes, and employment to which modern industrial economies seem to be prone. … The task of trade cycle theory is therefore not confined, as it has been so often in the past, to explaining the similarities of successive fluctuations. The dissimilarities also have to be accounted for. It is certainly our task to indicate causes for downturn and upturn, and to analyse the cumulative processes of expansion and contraction. But on the evidence we have no right to believe that these causes will always be the same, nor to doubt that their relative force will vary from case to case. … The Trade Cycle cannot be appropriately described by means of one theoretical model. We need a number of models each showing what happens when certain potential causes become operative. The many models that have been constructed by economists in the past are therefore not necessarily incompatible with each other. Overinvestment and underconsumption theories, for instance, are not mutually exclusive. None of them of course is the true theory of the Trade Cycle; each is probably an unduly broad generalization of certain historical facts. Once we admit the dissimilarity of different historical fluctuations we can no longer look for an identical explanation. In dealing with industrial and financial fluctuations eclecticism is the proper attitude to take. There is little reason to believe that the causes of the crisis of 1929 were the same as those of the crisis of 1873.” (Lachmann 1978:100–101).
Moreover, Israel M. Kirzner seems to have had the same view as Lachmann:
“AEN: Do you accept the idea that interest-rate manipulation by the central bank can cause distortions in the structure of production?

KIRZNER: Certainly the Austrian cycle theory showed brilliantly how this can happen. But it’s one thing to develop a theory which could explain a downturn. It’s quite another to claim that historically every downturn is to be attributed to that particular theory. That does not necessarily follow. If one were asked, does this theory necessarily explain each and every cycle, I would say no.”
“An Interview with Israel M. Kirzner,” Austrian Economics Newsletter (vol. 17.1, 1997).
Under the sensible viewpoint of Lachmann that the “many models that have been constructed by economists in the past are therefore not necessarily incompatible with each other,” it would seem that Austrians could accept Irving Fisher’s debt deflation theory of depressions or even Hyman Minsky’s development of that theory in the financial instability hypothesis.

It is curious to me how the view of two leading Austrians like Lachmann and Kirzner that the Austrian business cycle theory (ABCT) is not a universal explanation of all “periodic ups and downs of output, incomes, and employment” in modern economies is ignored by any number of modern Austrians (especially your typical ignorant, internet “pop” Austrian), who instead dogmatically declare that ABCT is a universal theory that must explain every cycle ever seen in modern capitalist history.

BIBLIOGRAPHY

Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City.

41 comments:

  1. This line of argument isn’t going do anything for the Keynesians. The basis of the Austrian theory is ignorant acting man, the essential nature of economic calculation and the problems of knowledge. Funny money is going to impair economic calculation. The only questions are exactly how, when, where and why. Things are more complicated that focusing solely upon distorted interest rates. While distorted interest rates are probably the most important distorted price, funny money distorts all prices all of the time. Thus, while interest rates certainly helped fuel the housing bubble, so did the fact that there was a seemingly endless supply of future buyers who could get funny money loans to pay even higher prices down the road. Further, absent funny money price inflation in general, there would have been no need to purchase a home as an inflation hedge in the first place.

    Thus, the best criticism of Hayek is that a single natural interest rate and a total focus upon interest rates only is probably too simple of an explanation for the boom/bust cycle. Keynesian-style distortions still wreak havoc, but in a more complicated manner. Indeed, this real world complexity simply demonstrates the necessity of economic calculation via voluntary exchange.

    This line of argument gets you Keynesians exactly nowhere. Your policies are still the cause and voluntary exchange is still the solution.

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  2. The pop Austrians are a creation of the Auburn subschool.

    I hate to use such nasty language, but people who have actually visited and studied the Auburn institute have described it as a "Stalinist indoctrination camp". There is simply no other point of view ever considered there, not even that of a group of "leftist Austrians" called Austro-punks who have been marginalized by them, so the result is that it's all an echo chamber of people who voice the exact same opinions, not even engaging other fellow members of the same school.

    I think Professor Selgin, if you ask him, can tell you much about how great the diversity of thought in the actual Austrian School is, while how narrow the Mises Institute adherents have become in their perspectives.

    Even though MI is NOT a policy think tank and is purely for education and discourse, MI members just have an unusual dogmatism, that is perhaps transcended only by Professor Murphy.

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  3. "Funny money is going to impair economic calculation. The only questions are exactly how, when, where and why"

    Even on the issue FRB Austrians are divided.

    When you refer to "Austrian theory" rejecting "funny money" (fiduciary media,) you ought actually to say "Rothbarian anarcho-capitalists" or "Austrian followers of Hoppe". The Austrians who follow Selgin/White and free banking don't share the hostility to fiduciary media or FRB.

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  4. 'When you refer to "Austrian theory" rejecting "funny money" (fiduciary media,) you ought actually to say "Rothbarian anarcho-capitalists" or "Austrian followers of Hoppe".'

    Indeed. The school of Wieser, Bohm-Bawerk, and Hayek does not deserve association with the Rothbardian cult. Nor does the tradition of Bentham, Mill, and George deserve association with such "libertarians". Rothbardians should not be permitted to ride the coat-tails of less repugnant schools of thought.

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  5. When you refer to "Austrian theory" rejecting "funny money" (fiduciary media,) you ought actually to say "Rothbarian anarcho-capitalists" or "Austrian followers of Hoppe". The Austrians who follow Selgin/White and free banking don't share the hostility to fiduciary media or FRB.

    Not many Austrians "follow" Selgin and White or free banking FRB. This internal dispute among Austrians regarding FRB is akin to the internal dispute among the umbrella group of Keynesians regarding the IS/LM model of John Hicks.

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  6. "Not many Austrians "follow" Selgin and White or free banking FRB."

    Provide proof for that statment.

    Selgin, who is in a position to know, disputes this:

    "However, I think you give the Rothbardians too much credit by characterizing their anti-fractional reserve position as the "Austrian" view. Even among self-styled Austrian economists (I say "economists" to make clear that I'm not counting mere "fans" of Austrian economics, many of whom know no more about it than what they read on Mises.com), it is a minority view."

    Note he is referring to actual economists, academics, and people who have made contributions to Austrian economics professionally, not the hordes of fan boys on the internet.

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  7. As a Rothbardian, I couldn't care less if people want to attempt the use of FRB in voluntary relationships. However, both the depositor and payee of bank notes must be fully informed of the difference between these notes and warehouse receipts. People may acccept them and they may not. It may work and it may not work.

    Nevertheless, it's quite a different system than government monopoly issued notes that purport to be warehouse receipts but are really FRB.

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  8. "As a Rothbardian, I couldn't care less if people want to attempt the use of FRB in voluntary relationships."

    Then by the logic of your own business cycle theory, modern capitalist economies where voluntary FRB exists (and all the empirical evidence suggets it would quickly be adopted anyway) would STILL be subject to business cycles - and that is an UNAVOIDABLE outcome of voluntary, free market systems.

    So much for the "voluntary, free market" being the best system possible.

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  9. "Not many Austrians "follow" Selgin and White or free banking FRB."

    Provide proof for that statment.

    The evidence for that statement is that almost all Austrians today are Rothbardians/Misesians when it comes to the monetary system.

    Selgin, who is in a position to know, disputes this:

    "However, I think you give the Rothbardians too much credit by characterizing their anti-fractional reserve position as the "Austrian" view. Even among self-styled Austrian economists (I say "economists" to make clear that I'm not counting mere "fans" of Austrian economics, many of whom know no more about it than what they read on Mises.com), it is a minority view."

    Selgin is incorrect. Support for fractional reserve banking is the minority view in the Austrian School.

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  10. "As a Rothbardian, I couldn't care less if people want to attempt the use of FRB in voluntary relationships."

    Then by the logic of your own business cycle theory, modern capitalist economies where voluntary FRB exists (and all the empirical evidence suggets it would quickly be adopted anyway)

    False. Historical data does not prove anything about what people will do in the future. If frb is or is not practiced in the past, that does not say anything with regards to whether it will or will not be practiced in the future. As Mises never tired in pointing out, there are no constancies in the field of human action. Human action depends on people's ideas, which can change.

    You positivist empiricists conflate theory with history, and treat them as interchangeable. If Bob paid a certain price for a good yesterday, or if a group of individuals went to a concert last week, then you yahoos treat this history as if it proves some kind of law of action. Theory and history are separate when it comes to human action, because we don't behave according to constant causal operative factors. We learn over time and our knowledge influences what we do. That anyone did anything specific in the past, such as practice fractional reserve banking, says nothing about any law that they will necessarily inevitably do so again in the future. Humans aren't robots.

    would STILL be subject to business cycles - and that is an UNAVOIDABLE outcome of voluntary, free market systems.

    Fractional reserve banking is not a free market institution, because it violates perhaps the most crucial free market institution of them all, namely, private property. Fractional reserve banking results in the creation of more than ownership claim present for the same property, that is, it creates more than one ownership claim to the same sum of money. That violates the institution of private property, which is no more than one party owner to a given property. If you own a house, or if you and someone else jointly own a house, then it is impossible that others own that house as well.

    Fractional reserve banking is just an attempt to have one's cake and eat it too. Banks and unscrupulous clients want to treat a demand deposit, somebody's property, as both a demand deposit and a loan at the same time. Demand deposits and loans are not the same.

    For an explanation of the legal aspects of fractional reserve banking, and how all attempts to justify it fail, see Jesus Huerto De Soto's book "Money, Bank Credit, and Economic Cycles."

    So much for the "voluntary, free market" being the best system possible.

    Non sequitur. That comment presumes that the "best" system possible is necessarily business cycle free. While that may be true, nothing of what you or Roddis said entitles you to make that non sequitur claim.

    You can't even claim that position and be consistent anyway, because you support central banking, and central banking systems do not stop business cycles. Indeed, theory can show us, and empirical history is fully consistent with this argument, that central banking systems generate worse business cycles compared to an absence of central banks. The two worst economic depressions in US history, the Great Depression of the 1930s and the current depression, occurred under central banking, not free banking or 100% reserve banking.

    So what we can conclude is that free banking, and 100% reserve banking, are AT LEAST superior to central banking.

    However, between free banking and 100% reserve banking, Austrians are split, but I argue that theory can show us that 100% reserve banking is superior, logically, economically and ethically.

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  11. "As Mises never tired in pointing out, there are no constancies in the field of human action. Human action depends on people's ideas, which can change. "

    This is extreme nonsense.

    It is height of absurdity it believe that suddenly tomorrow or in the near future people will suddenly stop eating, drinking, requiring medical care, having children, or a host of other things, etc.

    You ignore the fact a great deal of human behaviour has a genetic component, and will not change radically while humans have the same basic genome.

    As to actual economic activity, multiple societies have also independently developed similar ways of doing things or the same tool, like money.

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  12. "The two worst economic depressions in US history, the Great Depression of the 1930s and the current depression, occurred under central banking, not free banking or 100% reserve banking."

    A number of countries had NO central bank in 1930s yet still had severe depressions.

    You also ignore the depression of the 1890s, experienced by many countries, a number with NO central bank, such as Australia and the US.

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  13. "So what we can conclude is that free banking, and 100% reserve banking, are AT LEAST superior to central banking."

    False. Free banking led to catastrophic depression in Australia in the 1890s: it is now known that Australia's 1890s depresison was worse than its 1930s depression.

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  14. I've lived within 10 miles of the Canadian border for 60 years. Even so, most Michigan businesses will not accept Canadian money even though, in the short run, one can pretty much determine what it is worth. I suspect that people would refuse to accept free market FRB notes where warehouse receipts notes are available or would discount the FRB notes greatly. I have real problems wrapping my brain around something that is a demand deposit and a time deposit at the same time. If they cause problems, people won't accept them. If they don't, people might use them. I really just don't care.

    This doesn't resolve the statist paradox which claims that people are generically, genetically and a priori incapable of managing the risk of their own investments but are smart enough to choose their risk overseers backed up by SWAT teams while destroying private property and freedom of contract in the process.

    Free banking led to catastrophic depression in Australia in the 1890s: it is now known that Australia's 1890s depresison was worse than its 1930s depression.

    I seem to recall Quiggin quoting an authority which said there was a 30% reserve requirement in Australia during this period. If so, what the heck does that have to do with Rothbardians? A 30% reserve requirement for DEMAND DEPOSITS is a recipe for the disaster you decribe. Calling it "free banking" as though it reflects in any way upon the Austrians purposefully confuses the issue.

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  15. "As Mises never tired in pointing out, there are no constancies in the field of human action. Human action depends on people's ideas, which can change."

    It is height of absurdity it believe that suddenly tomorrow or in the near future people will suddenly stop eating, drinking, requiring medical care, having children, or a host of other things, etc.

    It is the height of ignorance of the Austrian School to argue that because someone ate food yesterday at a certain time and place at a certain price, that there exists some mathematical formula that implies constancy over time such that we can predict whether that individual will eat at all the next day, let alone eat a specific food at a specific time at a specific place at a specific price, using the data from the prior day.

    You are conflating an expectation you have that "around X% people out of a given population will eat tomorrow" with some sort of scientific insight that is based on observing past data and creating a constant law association between past data and future data.

    You ignore the fact a great deal of human behaviour has a genetic component, and will not change radically while humans have the same basic genome.

    You are ignoring the purposeful action that takes place on the basis of ideas, rather than biological necessity.

    Just because you know that humans biologically need to eat in order to live, that doesn't at all mean you can derive a formula that predicts when an individual will eat, where, from who, at what price, given any input variables from past data. No such connections exist.

    As to actual economic activity, multiple societies have also independently developed similar ways of doing things or the same tool, like money.

    That money has arisen in almost all societies is explained by praxeological reasoning, not some magical formulas that can tell us if an individual or group of individuals will adopt a money, given past data.

    You're still conflating historicism for theory.

    "The two worst economic depressions in US history, the Great Depression of the 1930s and the current depression, occurred under central banking, not free banking or 100% reserve banking."

    A number of countries had NO central bank in 1930s yet still had severe depressions.

    Red herring. My argument was that the two largest depressions in US history occurred under central banking, not free banking or 100% reserve banking. And out of the supply of all countries in the 1930s, those with central banks went through the worst depressions.

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  16. You also ignore the depression of the 1890s, experienced by many countries, a number with NO central bank, such as Australia and the US.

    No, I'm not "ignoring" them. That is another argument altogether from the one I made. I can't make all arguments all the time. I can only make one argument at a time.

    At any rate, there was no depression of the 1890s. You, like so many other monetary cranks, conflate falling prices with depression, when the two are not the same phenomena.

    Prices fell by about 1% per year, but, if you actually looked at the real production taking place, real net national product rose at the rate of 3.7% per year from 1879 to 1897, while per-capita net national product increased by 1.5% per year. The economy was GROWING throughout the 1890s, it was NOT in any depression.

    Just as in the previous decade, the money supply grew, but not fast enough to overcome the great increases in productivity and the supply of products. The major difference in the two periods is that money supply rose more rapidly from 1879 to 1897, by 6% per
    year, compared with the 2.7% per year in the earlier era. As a result, prices fell by less, by over 1% per year as contrasted to 3.8%.

    The National Banking Acts of 1863–1864 had semi-cartelized the banking system. Only certain banks could issue money, but all other banks had to have accounts at these. The financial panics throughout the late nineteenth century were a result of the arbitrary credit creation powers of the banking system. While not as harmful as today’s central bank inflation mechanism, it was still a storm in an otherwise fairly healthy economic climate.

    The fateful decade of the 1890s saw the return of the agitation for free silver, which had lain dormant for a decade. The Republican Party intensified its longtime flirtation with inflation by passing the Sherman Silver Purchase Act of 1890, which roughly doubled the Treasury purchase requirement of silver. The Treasury was now mandated to buy 4.5 million ounces of silver per month.

    Furthermore, payment was to be made in a new issue of redeemable greenback currency, Treasury notes of 1890, which were to be a full legal tender, redeemable in either gold or silver at the discretion of the Treasury.

    Another unsettling inflationary move made in the same year was that the New York Subtreasury altered its longstanding practice
    of settling its clearinghouse balances in gold coin. Instead, in August 1890, it began using the old greenbacks and the new Treasury notes of 1890. As a result, these paper currencies largely replaced gold paid in customs receipts in New York.

    Uneasiness about the shift from gold to silver and the continuing free-silver agitation caused foreigners to lose further confidence in the U.S. gold standard, and to cause a drop in capital imports and severe gold outflows from the country. This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.

    Source: Murray Rothbard, Monetary History of the United States.

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  17. I’m assuming this is from the real John Quiggin. I do not have access to the authorities cited. If these facts are incorrect then let’s obtain the corrected facts:

    The 1840 Colonial Bank Regulations issued by British Treasury governed colonial banking. The requirements included that: capital should be a determinant amount and must be fully subscribed; total debts must not exceed three times the paid up capital and that all notes were to be payable on demand in specie at the place of issue. Failure to pay on demand for a total of 60 days in any year entailed forfeiture of incorporation. Personal liability for bank shareholders was capped at an amount equal to twice capital and loans against real estate, shops or merchandise were to be prohibited. Amendments to the regulations in 1846 limited the note issue to the amount of paid up capital.
    Banking was not substantially affected by the regulations, however. For example, the restrictions on total debt and note issue were largely ignored (Butlin 1986). Likewise, banks found loopholes around the prohibition on lending for land (Pope 1989). In practice, Australian colonial banks were allowed to raise the limits on note issue by including coin and bullion in paid-up capital. Over time, even this stricture was relaxed; by 1856 the Bank of Australasia secured a licence to print private notes up to the value of three times its specie and bullion holdings. Reserve requirements were easily met as “double counting” was permitted: reserves used to back the note issue were simultaneously used to provide liquidity in the event of a deposit withdrawal. Rules limiting total indebtedness were also no threat because deposits were excluded.
    This freedom of note issue was, however, accompanied by strong liability provisions. In most colonies by the late 1860s, shareholders had unlimited liability for their note issue (Pope 1989).

    Source is OPTIMAL REGULATION OF ELECTRONIC MONEV: LESSONS FROM THE “FREE BANKING” ERA IN AUSTRALIA
    by
    THOMAS A. ROHLING AND MARK W. TAPLEY*
    Economic Papers: A journal of applied economics and policy

    Volume 17, Issue 4, pages 7–29, December 1998


    http://tinyurl.com/3lw67uw

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  18. "It is the height of ignorance of the Austrian School to argue that because someone ate food yesterday at a certain time and place at a certain price, that there exists some mathematical formula that implies constancy over time such that we can predict whether that individual will eat at all the next day"

    This is typical of you: refuting an argument that wasn't even made.

    I didn't claim above that you can predict from where "someone ate food yesterday at a certain time and place at a certain price, that there exists some mathematical formula that implies constancy over time such that we can predict whether that individual will eat at all the next day" - you have made this nonsense up.

    My statement:

    "It is height of absurdity it believe that suddenly tomorrow or in the near future people will suddenly stop eating, drinking, requiring medical care, having children, or a host of other things, etc."

    Different thing from your laughable rubbish.

    "Just because you know that humans biologically need to eat in order to live, that doesn't at all mean you can derive a formula that predicts when an individual will eat, where, from who, at what price, given any input variables from past data"

    More pointless nonsense, since such an assertion is not made anywhere above.

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  19. "At any rate, there was no depression of the 1890s. You, like so many other monetary cranks, conflate falling prices with depression, when the two are not the same phenomena."

    (1) In the case of Australia that is false:

    http://socialdemocracy21stcentury.blogspot.com/2011/06/australian-business-cycle-in-19th.html

    One of the worst downturns in the Australian business cycle was the depression from 1890 to 1893, exacerbated by the financial crisis of 1893. Australia had a massive property bubble in the 1880s under a gold standard and a free banking system. Before 1893 there was a speculative boom, in real and financial assets, fuelled by inflows through the capital account, mainly from Britain. Then came the collapse of the asset bubble in 1889/1890:

    “In Australia, GDP fell for four years running, from 1890 through 1893 ... Unemployment rose sharply. Immigration slowed and tentatively reversed direction. Social disorder spread, led by protesting sheep shearers, dock workers, and miners. Post-1893 recovery, if it may be called that, was slow and uneven” (Adalet and Eichengreen 2007: 233).

    In Australia, real GDP fell by around 10% in 1892 (Kent 2011), and by 7% in 1893, and deflation occurred from 1891 to 1897. After 1895, growth returned but the economy was mired in what we can call a chronic underemployment disequilibrium, just as many countries were in the 1930s.

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  20. As for the US in the 1890s, on the basis of real GNP estimates there was either (1) a severe depression, (2) severe recession, (3) a recession with very high unemployment persisting for nearly a decade.

    The Kuznets-Kendrick series shows a real GNP fall of 4% from 1892 to 1893 and another 6% decline from 1893 to 1894, with a further fall of 2.5% from 1895 to 1896. By this data, the 1890s was hit by a full-blown depression (that is, where output fell by 10% or more).

    According to Balke and Gordon, real GNP contracted by 2.96% from 1892 to 1894, and, after a recovery in 1895, by 2.27% from 1895 to 1896 (Balke and Gordon 1989: 84, Table 10). Balke and Gordon, then, show a quite severe recession, but not a depression.

    Romer’s estimates show a 1.69% contraction in GNP from 1892 to 189(Romer 1989: 22, Table 2), but she confirms the very severe unemployment through the rest of the decade.

    http://socialdemocracy21stcentury.blogspot.com/2011/01/us-gnp-estimates-in-recession-of-1890s.html

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  21. "So what we can conclude is that free banking, and 100% reserve banking, are AT LEAST superior to central banking."

    False. Free banking led to catastrophic depression in Australia in the 1890s: it is now known that Australia's 1890s depresison was worse than its 1930s depression.

    Australia does not constitute proper evidence against my argument about the US. That the two worst depressions in the US occurred under central banking means that in the US, free banking, and 100% reserve banking, are AT LEAST superior to central banking."

    At any rate, the Australian depression of the 1890s was not only NOT "worse than the US Great Depression", since the worst was over by 1894 and the economy was already rebounding (see Cannon, Michael "The Land Boomers."), but it also consistent with my original thesis that 100% reserve banking is superior to free banking. This is because the problem isn't that the central bank is a central bank. It's what it generates. Central banking systems can generate credit expansion over time, and it is credit expansion that is the culprit. Credit expansion is possible in the absence of central banks, and that is what generated the property and capital boom during the 1880s, which culminated in a collapse.

    You fallaciously believe that the Austrian position is that abolishing central banking is all that needs to be done. But it is in fact just a first step.

    You didn't criticize my position because my position is that traditional legal principles of contracting and private property rights dictate that 100% reserve banking is the only justified banking system.

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  22. real net national product rose at the rate of 3.7% per year from 1879 to 1897, while per-capita net national product increased by 1.5% per year. The economy was GROWING throughout the 1890s, it was NOT in any depression.

    First, I didn't say there was some endless long depression from 1873-1897 or 1879-1890, or 1879-1897 in America.

    I was talking about the depression of the 1890s - which is the economic contraction from 1892-1894 and 1895-1896 seen in ALL the estimates except Romer's.

    Get your damn facts straight.

    And your quote from Rothbard CONFIRMS there was a severe downturn in the 1890s:

    This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.

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  23. "In Australia, GDP fell for four years running, from 1890 through 1893, unemployment rose sharply. Immigration slowed and tentatively reversed direction. Social disorder spread, led by protesting sheep shearers, dock workers, and miners. Post-1893 recovery, if it may be called that, was slow and uneven."

    Falling nominal spending in dollars (GDP) does not equate to a depression.

    In Australia, real GDP fell by around 10% in 1892 (Kent 2011), and by 7% in 1893

    A two year correction after massive credit expansion of the Australian banking system is NOT a "depression worse than the US Great Depression." The Great Depression in the US lasted from 1929 to 1946.

    and deflation occurred from 1891 to 1897.

    Falling prices is not evidence of depression.

    After 1895, growth returned but the economy was mired in what we can call a chronic underemployment disequilibrium, just as many countries were in the 1930s.

    No, it was not "mired" in chronic unemployment. Unemployment fell after the peak in 1894, and by the end of the decade, unemployment was only at around 4%.

    http://melbourneinstitute.com/wp/wp97n24.pdf

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  24. "At any rate, the Australian depression of the 1890s was not only NOT "worse than the US Great Depression", since the worst was over by 1894 and the economy was already rebounding "

    The Australian economy was NOT rebounding from 1894.

    From 1895 there feeble growth and chronic unemployment.

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  25. real net national product rose at the rate of 3.7% per year from 1879 to 1897, while per-capita net national product increased by 1.5% per year. The economy was GROWING throughout the 1890s, it was NOT in any depression.

    First, I didn't say there was some endless long depression from 1873-1897 or 1879-1890, or 1879-1897 in America.

    Red herring. I didn't claim you did.

    I was talking about the depression of the 1890s - which is the economic contraction from 1892-1894 and 1895-1896 seen in ALL the estimates except Romer's.

    And your quote from Rothbard CONFIRMS there was a severe downturn in the 1890s:

    I did not claim that there was no severe downturn in the 1890s. After a decade of credit expansion during the 1880s, of course there would have to be a correction.

    This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.

    Reduced potential does not mean reduced in absolute terms.

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  26. The Australian economy was NOT rebounding from 1894.

    Yes, it was. I provided a source that confirms this.

    From 1895 there feeble growth and chronic unemployment.

    "Feeble growth"? Real net national product rose at the rate of 3.7% per year from 1879 to 1897 is "feeble growth"? Per-capita net national product increasing by 1.5% per year is "feeble growth"?

    By that logic, the US central bank has overseen an economy that has been feebly growing for almost three years running (since 2008).

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  27. As for the US in the 1890s, on the basis of real GNP estimates there was either (1) a severe depression, (2) severe recession, (3) a recession with very high unemployment persisting for nearly a decade.

    Nope. There was real growth. There was a correction after the bubble that lasted about two years. Unemployment began falling around 1894, and reached a minimum of 4% by the end of the decade.

    The Kuznets-Kendrick series shows a real GNP fall of 4% from 1892 to 1893 and another 6% decline from 1893 to 1894, with a further fall of 2.5% from 1895 to 1896.

    In other words, Kuznets calculated that the fall was starting to decline by 1895. And "real GNP" is not a proper measure for growth, because it just measures dollar spending indexed by a crude deflation/inflation statistic.

    By this data, the 1890s was hit by a full-blown depression (that is, where output fell by 10% or more).

    Real GNP is not output. Real GNP is a highly netted product that ignores a huge portion of output.

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  28. A two year correction after massive credit expansion of the Australian banking system is NOT a "depression worse than the US Great Depression."

    Priceless. You are at your best here: you TOTALLY invent a non existent quote from me:

    A two year correction after massive credit ... is NOT "depression worse than the US Great Depression."

    There is NO such assertion, quote or claim above. You are a utter joker.
    My statement:

    "Free banking led to catastrophic depression in Australia in the 1890s: it is now known that Australia's 1890s depression was worse than its 1930s depression."

    The Great Depression in the US lasted from 1929 to 1946.

    LOL...
    What is your definition of depression?

    My definition is the widely used one in modern economics, and I stick to it:

    (1) a period of contraction where real GDP/GNP falls by 10% of more

    Define what you mean by "depression" and STICK to that definition, you laughable clown.

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  29. The argument that real net national product rose at the rate of 3.7% per year from 1879 to 1897, while per-capita net national product increased by 1.5% per year, and that the economy was GROWING throughout the 1890s, it was NOT in any depression, is ONLY to be taken as an argument against your claim that the data show a contraction. I do not consider these statistics to be themselves optimal for judging economic growth, because they leave out so much of what takes place.

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  30. First this doesn't even show Australian unemployment in the 1890s:

    http://melbourneinstitute.com/wp/wp97n24.pdf

    It shows a figure of 4% by 1900, but shows NO figures for 1891 1892 1893 1894 1895 1896 1897 1898 1899.

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  31. A two year correction after massive credit expansion of the Australian banking system is NOT a "depression worse than the US Great Depression."

    My statement:

    "Free banking led to catastrophic depression in Australia in the 1890s: it is now known that Australia's 1890s depression was worse than its 1930s depression."


    Ah, I incorrectly inferred that by "its" you were referring to the US Great Depression, because I though the context was still the US.

    What is your definition of depression?

    My definition is the widely used one in modern economics, and I stick to it:

    (1) a period of contraction where real GDP/GNP falls by 10% of more

    My definition I think is superior, because your definition would consider a one day event where GDP falls by 10%, only to rebound almost immediately after, say the next day or week, to be a depression.

    I define a credit cycle depression the same as a recession, and the same as a correction and the same as a collapse. I define them all as a prolonged period of time where an economy is undergoing a correction after being shocked by previous credit expansion which distorted the economy's temporal productive structure.

    What is prolonged? My rule of thumb is to take whatever the time period is implied in an official recession, and any time beyond that the recession turns into a depression.

    Your definition does not consider time periods, so I don't think it's a good one.

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  32. First this doesn't even show Australian unemployment in the 1890s:

    I know it doesn't. I cited it to show you the level of unemployment by 1900, so that we can infer that the "widespread unemployment" reported ~1894 must have declined over time.

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  33. As for unemployment in the Australian depression of the 1890s:

    "A highly speculative urban land boom of the late-80s also burst, when prices fell, causing the temporary failure of most financial institutions during 1892-4, and the loss of savings by many small depositors. Unemployment reached about 30 per cent, ..."

    This figure was either the same or above that for Australia's experience of the Great Depression, where Australia's unemployment rate increased to a peak of 29 per cent in 1932.

    The figure of you cite for 1900 is challenged here:

    [sc. Australian] Unemployment never fell below 6 per cent from 1900 to 1914.

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  34. "I define a credit cycle depression the same as a recession, and the same as a correction and the same as a collapse. I define them all as a prolonged period of time where an economy is undergoing a correction after being shocked by previous credit expansion which distorted the economy's temporal productive structure."

    LOL... Then there were any number of "depressions" in the 19th century:

    1815–21
    1822–1823
    1825–1826
    1828–1829
    1833–34
    1836–1838
    1839–late 1843
    1845–late 1846
    1847–48
    1853–54
    1860–61 recession
    1865–67
    1869–70
    1873-1874/5
    1882–85
    1887–88
    1890–91
    1895–1897
    1899–1900

    http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

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  35. "The evidence for that statement is that almost all Austrians today are Rothbardians/Misesians when it comes to the monetary system"

    It is a fallacy to put Rothbardians and Misesians together in saying that they both support the same monetary system. It has been made quite clear that Mises supported the free banking position in relation to a Rothbardian monetary system. Sure people like George Selgin or L.White say they build upon Hayek's work on banking but they both acknowledge that Mises held a free banking view as well. Actually, Roger Garrison said in his recent interview for the Panic of 2008 film that his justification for being a free banker comes from the Mises book, "Theory of Money and Credit." It is such a same that the Rothbardians misrepresent Misesian monetary view as 100 reserve hogwash

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  36. "It is such a **same that the Rothbardians misrepresent Misesian monetary view as 100 reserve hogwash "

    I meant 'shame' instead of 'same'

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  37. I didn't know Roger Garrison was a free banker.
    Thank you for this comment.

    This raises the question: if Garrison is a free banker and supports banks issuing fiduciary media (in a commodity money system), then surely (accoridng to Garrison's own logic as the leading proponent of ABCT) it will be recipe for an economy hit by perpetual Austrian trade cycles. How does Garrison deal with this?

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  38. Yes, Garrison is one, he was actually the professor that 'converted' me into the free banking position while I was at Mises University this past summer.

    To answer your concern quickly, in Garrison's mind, the boom and bust cycles are triggered not by fractional reserve banks, but by central banks. Here is what he says in that interview when asked if fractional reserves can exist in a free market (which can be found on youtube if you type 'roger garrison panic 2008'):

    'I take my cue from Ludwig von Mises and especially in his earliest book, 'The Theory of Money and Credit'. And in that book, he makes it clear that the root problem is not the fractional reserve, per se, but it is the central decision making of the bank, That if you have a monopoly bank, then there is nothing to restrain it from issuing money at will, from increasing the money supply. It doesn't have to worry about people using competitive banks of issue...There is only one bank, the central bank. If you have competition between the banks, then its a game changer...The competition between the banks will keep them in check.'

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  39. That is very interetsing. Thank you.
    I will go to watch this video.

    But a thought occurs: many countries had no central bank in the 19th century (Australia, the US ouside its early experiments), yet these nations still had business/trade cycles. Unless you want to explain those cycles without ABCT, then even Garrison's defense is problematic.

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  40. I do not know how Garrison would respond... but most free bankers take the position that the ABCT is a good theory that explains certain boom and busts but not all. I have not studied Australian banks so I wouldnt know how to answer your concern...I am, somewhat, new to economics still.

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