I am principally interested in his comments from 7.47, where talks about the Austrian business cycle theory (ABCT). All of the flaws of ABCT are in display.
Some points:
(1) Garrison blames the central bank for the crisis, and repeats the ABCT explanation. Garrison relies on the unique natural rate of interest concept, which simply does not exist.
(2) Garrison ignores the role of asset bubbles funded by excessive consumer debt.
(3) His “free market in loans” explanation of the interest rate is a flawed real theory of the interest rate. Its analysis is an invalid attempt to model a modern monetary economy as though it were a barter economy where loans are made in real goods.
(4) Roger Garrison reveals that he is a free banker. He attempts to blame the central banks for over-issue of money, and absolve fractional reserve banking of responsibility. This strikes me as highly problematic. If Garrison is a free banker and supports banks issuing fiduciary media (in a commodity money system), then surely (according to Garrison’s own logic as the leading proponent of ABCT), it will be recipe for an economy hit by perpetual Austrian trade cycles. The idea that competitive free banking will not over-issue notes strikes me as devoid of any empirical evidence: many countries had no central bank in the 19th century (Australia, the US etc.), yet these nations still had business/trade cycles. Unless Garrison wants to explain those cycles without ABCT, then what caused these business cycles?
(5) Garrison admits that QE1 and QE2 have not increased the broad money supply significantly. Yet he still conjures up scare-mongering images of hyperinflation by the excess reserves entering the economy. Garrison’s idea that we are in unchartered territory with QE is false. Japan already did QE from 2001 to 2006. Japan’s experience with QE shows us how nonsensical these ideas are, and confirms the endogenous theory of money. Deflation continued for years despite QE by the Bank of Japan. Lending is demand constrained, and central banks can drain excess reserves without difficulty. If one wants to stop cheap money from a zero interest rate policy (ZIRP) or QE from being used in commodity and asset speculation, one can impose financial regulation on the flow of credit.
(6) Garrison, like most Austrians, is clueless about the recession of 1920–1921. The interested reader can see my debunking of the Austrian nonsense about that recession here:“The US Recession of 1920–1921: Some Austrian Myths,” October 23, 2010.(7) The claim that the New Deal made everything worse is false. America experienced a recovery from 1933–1936 under Roosevelt, with high real GDP growth and falling unemployment. When contractionary fiscal and monetary policy was implanted in 1936-1937 the economy collapsed into recession.
“There was no US Recovery in 1921 under Austrian Trade Cycle Theory!,” June 25, 2011.
The recovery in 1937 onwards was accomplished by increased fiscal policy. While the cartelist and price-fixing elements of the National Industrial Recovery Act (NIRA) were hardly any great aid in recovery and may have harmed it, this was the view of Keynes himself.
(8) Garrison’s explanation of stagflation does not move beyond a simple critique of neoclassical synthesis Keynesianism. He displays no knowledge of Post Keynesianism, or the fact that stagflation can be easily explained by Keynes’s General Theory.
The lack of central bank is not synonymous to free banking. If banks are not allowed to issue their own notes (e.g. England), diversify their loans (limitations on branch banking in US) it will lead to trade cycle. If the supply of gold growth (or other commodity base money) growths too quickly it might also lead to over-expansion. I had a chance to speak about this with Garrison himself. He told me that his theory is only the one side of Yeager's monetary equilibrium story. It’s no surprise since, if I remember correctly, Yeager was Garrison's PhD advisor (or whatever you call it in US).
ReplyDeleteThe connection between ABCT and free banking is much more complicated. There are basically two camps: Rothbardians and free bankers. Both of them use the concept of natural rate of interest, which is a core of ABCT. However they differ on the definition of savings, which in turn causes differences in the way they analyze the effects of fractional reserves.
Judging by your previous posts, you are already familiar with Rothbardian version of ABCT. For a short overview of free banking approach see: Selgin, White "In Defense of Fiduciary Media", The Review of Austrian Economics, Vol. 9, No. 2, (1996). You can find it here: http://mises.org/journals/rae/pdf/RAE9_2_5.pdf
The whole article is very good. However, the part about fractional reserves and ABCT starts on page 100.
"If the supply of gold growth (or other commodity base money) growths too quickly it might also lead to over-expansion."
ReplyDeleteIndeed, and that can also happen by monetary expansion via your capital account.
This should logically lead you to the conclusion that a free banking system isn't by any means the best monetary system.
19th century Australia, whose banking system came close to the free banking ideal, experienced a large surge in gold inflows, contributing significantly to its huge real estate bubble, which collapsed in the 1890s, causing a very severe depression and mass unemployment. That business cycle is best analysed by means of Irving Fisher's debt deflation theory and Hyman Minsky's financial instability hypothesis.
Despite the repeated claims I hear, a free banking system could easily lead to depression on the scale of the 1930s. It certainly did in Australia in the 1890s.
What do you mean by "my capital account"?
ReplyDelete"free banking system isn't by any means the best monetary system"
Free banking on what standard? Free banking by itself is not a monetary system - it's rather a type of banking system. There is still a need for some kind of base money.
It's obvious that if the supply of base money is exogenous and highly volatile it would cause problems. Especially if prices are sticky. As you probably agree, prices are very sticky both downwards and upwards (especially prices of labour). So it is no surprise that huge inflows of gold caused trade cycle in Australia, despite free banking system.
This is why, my ideal system would have fixed supply of outside money (or supply that growths at fixed rate).
I don't know Australian case at all (can you recommend any good articles?), so I can't comment if Minsky's theory is of any use there.
What do you mean by "my capital account"?
ReplyDeleteyour capital account = your country's capital account.
"This is why, my ideal system would have fixed supply of outside money (or supply that growths at fixed rate)."
I see. Something like a constant money growth rule, as in Friedman's pure monetarism.
I don't know Australian case at all (can you recommend any good articles?)
Hickson, C. R. and J. D. Turner. 2002. “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
Lord Keynes, I (think I) understand the critiques made by Sraffa on the "natural rate" concept. Still, do you consider there is no such concept as monetary equilibrium? If it exists, then a kind of natural rate should enter the scene, and this should be targetted in order to have sound currency (ie. without inflationary nor deflationary peaks). What do you think?
ReplyDeleteOf course there is such a concept. There is a concept of static equilibrium too, but it doesn't exist in the real world.
ReplyDeleteIf "monetary equilibrium" is supposed to mean a situation where the supply of money equals the demand for money, what does one count in the demand for money?
Do we include demand for money to be used for speculative gambling on asset prices? If so, any such "monetary equilibrium" would not necessarily be a stabilising thing. Your economy could collapse into debt deflation after a huge asset bubble burst that had been funded by rising levels of private debt.
So you're saying that the concept of monetary equilibrium does not apply to the real world?
ReplyDeleteIn sense in which it the expression "monetary equilibrium" was used by Hayek, of course it is an invalid and useless concept, irrelevant to the real world.
ReplyDeleteWhy? Hayek has just adopted Wicksell's monetary equilibrium analysis, requiring a unique natural rate of interest which equates investment and saving (in real terms), which is supposed to produce stable prices.
Underlying it all is ridiculuous "real" analysis which treats a modern money-using capitalist economy as if were a barter economy.
What utter rubbish.
ReplyDelete(1) Garrison blames the central bank for the crisis, and repeats the ABCT explanation. Garrison relies on the unique natural rate of interest concept, which simply does not exist.
It is not necessary to the ABCT that there is one or many natural interest rates. As long as the nominal interest rate or rates are pushed below the market rate or rates by the Federal Reserve System, which it does as a matter of policy, then the ABCT applies.
(2) Garrison ignores the role of asset bubbles funded by excessive consumer debt.
Bubbles cannot form on the basis of endogenous consumer debt. "Excessive" consumer debt is a by-product of credit expansion.
(3) His “free market in loans” explanation of the interest rate is a flawed real theory of the interest rate. Its analysis is an invalid attempt to model a modern monetary economy as though it were a barter economy where loans are made in real goods.
Not even close. A free market in loans would be a market where the quantity of loans does not exceed the quantity of voluntary savings. Merely claiming that the theory is "flawed" or "invalid" is not a proper rebuttal.
(4) Roger Garrison reveals that he is a free banker. He attempts to blame the central banks for over-issue of money, and absolve fractional reserve banking of responsibility. This strikes me as highly problematic. If Garrison is a free banker and supports banks issuing fiduciary media (in a commodity money system), then surely (according to Garrison’s own logic as the leading proponent of ABCT), it will be recipe for an economy hit by perpetual Austrian trade cycles. The idea that competitive free banking will not over-issue notes strikes me as devoid of any empirical evidence: many countries had no central bank in the 19th century (Australia, the US etc.), yet these nations still had business/trade cycles. Unless Garrison wants to explain those cycles without ABCT, then what caused these business cycles?
ReplyDeleteGarrison holds that free banking is superior to central banking, but admits that it will not totally eradicate the business cycle. He argues it will not result in "over"-issue of money, but will rather result in what Selgin, White, Cowen, and other free banking Austrians that you have agreed with in the past on this point have argued it will result in, which is a quantity consistent with the market's demand for money. I myself disagree with him on this, but if you are going to claim that free banking is bad because it will still result in the business cycle, then you can't possibly presume your advocacy is any better, since your position is an advocacy of central banking, which exacerbates any business cycle in free banking and credit expansion.
(5) Garrison admits that QE1 and QE2 have not increased the broad money supply significantly. Yet he still conjures up scare-mongering images of hyperinflation by the excess reserves entering the economy.
They are not scare-mongering images of hyperinflation. They are arguments that follow from certain premises, one of which is the quantity of excess reserves currently held by the banking system. With such high quantities of excess reserves, high rates of aggregate monetary growth are possible.
Garrison’s idea that we are in unchartered territory with QE is false. Japan already did QE from 2001 to 2006. Japan’s experience with QE shows us how nonsensical these ideas are, and confirms the endogenous theory of money. Deflation continued for years despite QE by the Bank of Japan. Lending is demand constrained, and central banks can drain excess reserves without difficulty. If one wants to stop cheap money from a zero interest rate policy (ZIRP) or QE from being used in commodity and asset speculation, one can impose financial regulation on the flow of credit.
Japan does not "confirm" the endogenous theory of money. The endogenous theory of money is inherently flawed. It can't possibly be empirically confirmed. Lending is demand constrained yes, but all the demand in the world cannot keep increasing the money supply over time unless the central bank creates new money. If the central bank ceases creating new money, then at some point the banking system will not be able to expand credit any further, and it won't matter how high of an interest rate borrowers offer.
(6) Garrison, like most Austrians, is clueless about the recession of 1920–1921. The interested reader can see my debunking of the Austrian nonsense about that recession here:
ReplyDelete“The US Recession of 1920–1921: Some Austrian Myths,” October 23, 2010.
Your crap post was debunked almost as soon as it was posted.
(7) The claim that the New Deal made everything worse is false.
No, that's true. The New Deal did make everything worse. It prevented the economy from recovering.
America experienced a recovery from 1933–1936 under Roosevelt, with high real GDP growth and falling unemployment.
No, that was not a recovery. It was an artificial stimulus like heroin. The increase in real GDP came at the expense of capital consumption, and was setting the stage for another false boom on a foundation of government spending and inflation.
When contractionary fiscal and monetary policy was implanted in 1936-1937 the economy collapsed into recession.
The economy went into another correction after the previous artificial stimulus.
The recovery in 1937 onwards was accomplished by increased fiscal policy.
Economic recovery is impossible if there is just an external to the market entity that prints and spends. It's not a recovery to work more hours and produce more goods for less in return because the buyer isn't producing anything themselves.
While the cartelist and price-fixing elements of the National Industrial Recovery Act (NIRA) were hardly any great aid in recovery and may have harmed it, this was the view of Keynes himself.
The government spending was also harmful.
(8) Garrison’s explanation of stagflation does not move beyond a simple critique of neoclassical synthesis Keynesianism. He displays no knowledge of Post Keynesianism, or the fact that stagflation can be easily explained by Keynes’s General Theory.
Garrison wasn't critiquing Post-Keynesianism, and stagflation cannot be explained by the GT. Since Keynes was wrong, his followers had to change the claims and form neo-Keynesianism. They were wrong too, so another change into New Keynesianism. They were wrong too, so another change into Post Keynesianism.
There are so many different smells of Keynesianism because none of them are right. With so many X-Keynesianism doctrines, it is evidence that the core of Keynesianism is utterly flawed.
You don't see "New Austrian" theory, or "Post Austrian" theory, because it doesn't need corrections.
"You don't see "New Austrian" theory,"
ReplyDeleteAu contraire :).
"Hence it was necessary for Mises to create anew his own “neo-Austrian” school of students and followers."
Murray Newton Rothbard, The essential von Mises, p. 26.
Rothbard is not happy with the 'hermeneutics' of the younger neo-Austrian scholars who have followed Ludwig Lachmann and GLS Shackle into their kaleidic universe of entrepreneurial indeterminism.
Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, p. 102
"It is not necessary to the ABCT that there is one or many natural interest rates."
ReplyDeleteA unique natural rate of interest is the basis of Mises business cycle theory. Many natural rates undermine the theory.
For Mises:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.” (Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala. pp. 107–108).
And it was also taken by Hayek.
I suggest you read:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html
"You don't see "New Austrian" theory,"
ReplyDeleteAu contraire :).
"Hence it was necessary for Mises to create anew his own “neo-Austrian” school of students and followers."
Murray Newton Rothbard, The essential von Mises, p. 26.
Misleading. What Rothbard was referring to was the fact that Bohm-Bawerk and his followers resisted what Mises wrote, which Rothbard then interpreted as Mises paving his own way, and Rothbard colloquially referred to Mises' insights as "neo-Austrian." It does not at all mean that Mises' framework was conceptually different from Bohm-Bawerk's framework. Austrians who read Bohm-Bawerk and Mises see no contradictions between the two.
There is no such thing as "Bohm-Bawerkian Austrian economics that is distinguishes from Misesian Austrian economics" such that there are two schools of Austrian economics, one original and one "neo." There is just the Austrian school. No Austrian economist considers themselves "neo".
"One of the problems with the explosion of the interest in Menger is it’s also an ideological drift connected with this, this hidden agenda in the accolades given to Menger, namely, a big depreciation or deprecation of Böhm-Bawerk. As Menger had been lauded as the great founder of the Austrian school, which he was, indeed, the achievements of Böhm-Bawerk have either been denigrated or forgotten and sort of stuffed away."
"This is part of what I call a nihilist trend in the modern Austrian movement. It’s also sort of an attempt to claim that Menger and BöhmBawerk were totally different, disagreed almost over everything and so forth and so on. I don't think that’s true."
Murray N. Rothbard, History of Economic Thought #4, transcribed, p. 4.
"[Kersner], in a very interesting article in The Atlantic Economic Journal about eight years ago or so, they had a whole issue on Menger. It was a typical Kersner article, very subtle. He’s one of the most understated economists I’ve ever read. You have to read him with great care. It’s pretty obvious that he’s refuting this idea that there’s a big split between Menger and Böhm-Bawerk, and that they’re really fairly similar."
Murray N. Rothbard, History of Economic Thought #4, transcribed, p. 15.
Rothbard is not happy with the 'hermeneutics' of the younger neo-Austrian scholars who have followed Ludwig Lachmann and GLS Shackle into their kaleidic universe of entrepreneurial indeterminism.
Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, p. 102
Again misleading. Notice how Gary North called Lachmann and his followers "neo-Austrians" to separate them from Mises, while Rothbard called Mises a "neo-Austrian" to separate him from Bohm-Bawerk?
In other words, there isn't any particularly "neo-Austrian" school that separates it from the "Austrian" school the way Post-Keynesian is separated from Keynesian.
Both North and Rothbard put "neo-Austrian" in quotes because there isn't in fact a true neo-Austrian school. There is just the Austrian school, and within the Austrian school, there are some minor disagreements on superficialities.
Just like today there are disagreements between, for example, the free banking Austrians and the 100% reserve Austrians. They are not different schools of thought.
"It is not necessary to the ABCT that there is one or many natural interest rates."
ReplyDeleteA unique natural rate of interest is the basis of Mises business cycle theory. Many natural rates undermine the theory.
It not NECESSARY to the Misesian business cycle theory. It just happened to have been presumed, as a placeholder for the interest rate (rates) that nobody can observe because the central bank has changed it (them).
It's not necessary to the theory that there be one natural rate before the business cycle theory can explain why capital is malinvested due to investors being misled as to the true quantity and nature of voluntary savings that would have generated a particular set of interest rates as opposed to the rates that exist in central banking.
For Mises:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.” (Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala. pp. 107–108).
We could easily rewrite that passage, without losing a single concept of generality, into:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rates’ to describe those interest rates which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rates of interest’ will be used for those interest rates asked on loans made in money or money substitute.”
In other words, instead of the natural rate being 5% on all goods in barter, there will instead be, say, 10 natural interest rates, 1%, 2%, ..., 10%, on 10 classes of goods in barter.
And it was also taken by Hayek.
Again, that some or even all Austrians said interest rate instead of interest rates, to describe the interest rates that would exist in the absence of central bank intervention, because they can't be observed anyway, does not in any way detract from the essence of the ABCT.
Neither you nor have any actual economists shown exactly how the introduction of natural interest rates as opposed to rates should in any way compromise the core of the ABCT insight.
I suggest you read:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html
But that is from this blog, which is of terrible quality. How can you presume that it constitutes a valid reference? That's hilarious.
"There is just the Austrian school, and within the Austrian school, there are some minor disagreements on superficialities."
ReplyDeleteFalse. The differences are not trivial, by any means, as I have shown here:
http://socialdemocracy21stcentury.blogspot.com/2010/12/different-types-of-austrian-economics.html
Certain Austrians accept the argument for a small/night watchman state, while others are anarcho-capitalists.
Since Rothbard wanted to justify his anarcho-capitalist system by a natural rights ethics and strongly rejected Mises's utilitarianism, you have yet another major difference on that issue.
Also, Austrians differ on the issue of plan/pattern co-ordination in modern capitalist economies. The Lachmann radical subjectivist wing rejects the notion plan/pattern co-ordination.
"Neither you nor have any actual economists shown exactly how the introduction of natural interest rates as opposed to rates should in any way compromise the core of the ABCT insight."
ReplyDeleteThe idea that no "actual economists shown exactly how the introduction of natural interest rates as opposed to rates should in any way compromise the core of the ABCT insight" is a statement of sheer ignorance.
Piero Sraffa showed in 1932 how multiple natural rates destroyed the foundation of Hayek's trade cycle:
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,”Economic Journal 42 (June): 249–251.
See here:
http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-and.html
Even the Austrian economist Robert Murphy recognises that Sraffa's critique of Hayek by using the non-existence of a unique natural rate outside equilibrium is devastating to classic ABCT, if you bother to read these posts where you will find links to Murphy's work and PhD:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html
"There is just the Austrian school, and within the Austrian school, there are some minor disagreements on superficialities."
ReplyDeleteFalse.
No, it's true. The differences are not significant.
The differences are not trivial, by any means, as I have shown here:
http://socialdemocracy21stcentury.blogspot.com/2010/12/different-types-of-austrian-economics.html
Either they are superficialities, or they are not even economics concepts.
Certain Austrians accept the argument for a small/night watchman state, while others are anarcho-capitalists.
Not an economics concept, but a political concept. Economically, Austrian economics is value free. What you're talking about are the political views of Austrian economists, which is completely separate from the economics framework.
Since Rothbard wanted to justify his anarcho-capitalist system by a natural rights ethics and strongly rejected Mises's utilitarianism, you have yet another major difference on that issue.
Rothbard disagreed with Mises' politics, not his economics.
Also, Austrians differ on the issue of plan/pattern co-ordination in modern capitalist economies. The Lachmann radical subjectivist wing rejects the notion plan/pattern co-ordination.
Lachmann is a fringe "Austrian" economist. Pointing to him as anything to do with the Austrian school proper is a straw man.
"Neither you nor have any actual economists shown exactly how the introduction of natural interest rates as opposed to rates should in any way compromise the core of the ABCT insight."
ReplyDeleteThe idea that no "actual economists shown exactly how the introduction of natural interest rates as opposed to rates should in any way compromise the core of the ABCT insight" is a statement of sheer ignorance.
False. It is a true statement.
Piero Sraffa showed in 1932 how multiple natural rates destroyed the foundation of Hayek's trade cycle:
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,”Economic Journal 42 (June): 249–251.
No, Sraffa did not at all show how multiple natural interest rates in any way compromises the ABCT. All he did was argue over a technicality in assumptions.
He did not at all show how multiple interest rates refutes the ABCT's core theory of inter-temporal dis-coordination between investment and consumption on account of the central banking system expanding credit that is unbacked by prior voluntary savings.
Sraffa did not at all cut through to the essence of ABCT when he challenged the Wicksellian notion of a natural interest rate.
See here:
http://socialdemocracy21stcentury.blogspot.com/2011/06/austrian-business-cycle-theory-and.html
More nonsense.
Even the Austrian economist Robert Murphy recognises that Sraffa's critique of Hayek by using the non-existence of a unique natural rate outside equilibrium is devastating to classic ABCT, if you bother to read these posts where you will find links to Murphy's work and PhD:
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html
http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html
Murphy did not in any way concede that the existence of multiple natural interest rates in any way refutes the ABCT. All he said was that the ABCT needs to have some slight adjustments. It is not "devastating" to the ABCT, and the fact that Murphy still adheres to the ABCT should have clued you into that fact. Murphy holds that the boom bust cycle is generated by the Austrian understanding. That he calls for the ABCT to be updated to include multiple natural interest rates is in fact a call for a cosmetic change. It doesn't refute the core principle of inter-temporal discoordination.
Neither you, nor any real economist, has ever showed how the existence of multiple natural interest rates REFUTES the ABCT's core principles.
"Lachmann is a fringe "Austrian" economist. Pointing to him as anything to do with the Austrian school proper is a straw man. "
ReplyDeleteI see, so he and the radical subejctivists are not members of the "Austrian school proper". You're just arbitarily re-defined what it means to be an Austrian.
You commit the no true scotsman fallacy.
Your Proposition 1: All Austrians have the same fundamental economic ideas.
My Proposition 2: Lachmann and the radical subjectivists differ on plan/pattern co-ordination, a major difference.
Your Proposition 3 Well, Lachmann and the radical subjectivists are not "true" Austrians, there are just "fringe" Austrians.
Let's move on from this feeble illogic.
"Sraffa did not at all show how multiple natural interest rates in any way compromises the ABCT. All he did was argue over a technicality in assumptions."
ReplyDeleteThe existence of a unique natural rate is no mere "technicality". It is assumed to be the equilibrium, market clearing rate that equates real goods in loanable supply with demand for such goods.
When the market/bank rate falls below it, that is when excessive capital goods investment supposedly leads to the distortion of higher-order stages of production.
With no unique natural rate there is no rate that a bank/market rate can even equal. The theory is hopelessly undermined.
As for Murphy, he concedes this is a major problem for Hayekian versions of ABCT, and he attempts to re-formulate the basic theory - a significant concession of Hayek's failure.
"Lachmann is a fringe "Austrian" economist. Pointing to him as anything to do with the Austrian school proper is a straw man. "
ReplyDeleteI see, so he and the radical subejctivists are not members of the "Austrian school proper". You're just arbitarily re-defined what it means to be an Austrian.
No, it means I looked at what the core essence of Austrian theory is, and realized that Lachmann does not adhere to it.
You commit the no true scotsman fallacy.
False. I did not define what an Austrian is to you, so I could not have ad hoc redefined it, thus committing the NTS fallacy.
You committed the fallacy of straw man, by ad hoc claiming that Lachmann is fully Austrian, and then claiming that because he said "X," it must mean "X" is a part of Austrian economics.
Your Proposition 1: All Austrians have the same fundamental economic ideas.
Is true.
My Proposition 2: Lachmann and the radical subjectivists differ on plan/pattern co-ordination, a major difference.
Lachmann is a fringe Austrian, not a true Austrian.
Your Proposition 3 Well, Lachmann and the radical subjectivists are not "true" Austrians, there are just "fringe" Austrians.
No, that would imply that my argument is a reactionary type argument that is based on some unstated premises. But it isn't. That Lachmann is not a true Austrian is a true argument that is not a fallacy.
"Sraffa did not at all show how multiple natural interest rates in any way compromises the ABCT. All he did was argue over a technicality in assumptions."
ReplyDeleteThe existence of a unique natural rate is no mere "technicality". It is assumed to be the equilibrium, market clearing rate that equates real goods in loanable supply with demand for such goods.
False. It is a technicality, because equilibrium retains its full meaning with multiple natural interest rates, as all nominal interest rates in the market tend towards those equilibrium natural rates in the absence of central bank intervention. But because the central banking system inflates credit and artificially lowers interest rates, inter-temporal dis-coordination is generated to the extent that natural interest rates are above or below the nominal, central bank influenced interest rates.
When the market/bank rate falls below it, that is when excessive capital goods investment supposedly leads to the distortion of higher-order stages of production.
When the market/bank rates fall below them, that is when malinvestment of capital goods investment leads to the distortion of higher-order stages of production.
With no unique natural rate there is no rate that a bank/market rate can even equal.
It's not necessary that there exists a single bank/market rate that tends towards a single natural interest rate before no malinvestment is generated. It is only necessary that there exists any number of bank/market rates that tend towards their natural rates, as would exist without central bank intervention.
Central banks do not just alter one interest rate. They influence a multiple number of interest rates, of various maturities, commodities, and investment types. As long as these nominal rates are different from where they otherwise would have been had they been financed by voluntary savings, then the ABCT applies.
The theory is hopelessly undermined.
Not even close. The theory is not in any way compromised in the slightest by the existence of multiple natural interest rates.
Instead of the free market tending towards a series of natural interest rates as investment tends towards voluntary savings/consumption patterns, the introduction of a central bank can influence these interest rates to be different from where they otherwise would have been, thus setting into motion discoordination between investment and consumption.
As for Murphy, he concedes this is a major problem for Hayekian versions of ABCT, and he attempts to re-formulate the basic theory - a significant concession of Hayek's failure.
Murphy does not in any way concede that the existence of multiple natural interest rates refutes the essence of the ABCT. The ABCT is so deep and profound that it is no wonder you can only think of cosmetic changes.
"Lachmann is a fringe Austrian, not a true Austrian."
ReplyDeleteYou prove my point.
And Eugen von Philippovich, Friedrich von Wieser, Richard von Strigl were Austrians and Fabian socialists (or at least sympathetic to Fabian socialism), and they believed that some state interventions could be justified on economic grounds when market failures occured.
E.g., in the words of Hayek, Wieser "in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice" (F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17).
Does this mean that von Philippovich, von Wieser etc. were not "true" Austrians either?
http://socialdemocracy21stcentury.blogspot.com/2010/10/friedrich-von-wieser-and-eugen-von.html
http://socialdemocracy21stcentury.blogspot.com/2011/06/why-are-there-no-austrian-socialists.html
"Lachmann is a fringe Austrian, not a true Austrian."
ReplyDeleteYou prove my point.
No, I didn't prove your point. You are confusing that argument that Lachmann is not a true Austrian with a logical fallacy of argumentation where a person defines something, but then ad hoc redefines it in the face of counter-evidence.
I didn't even define what it means to be an Austrian to you yet, so it is IMPOSSIBLE for me to have committed the NTS fallacy.
Just because you see someone saying "no true scotsman" that doesn't mean they necessarily committed the fallacy.
If I said "No true scotsmen are born and raised in Ireland," then I am still not committing the no true scotsman fallacy.
And Eugen von Philippovich, Friedrich von Wieser, Richard von Strigl were Austrians and Fabian socialists (or at least sympathetic to Fabian socialism), and they believed that some state interventions could be justified on economic grounds when market failures occured.
You're again conflating political disagreements with disagreements in economic theory.
E.g., in the words of Hayek, Wieser "in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice" (F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17).
More straw man fallacy.
Does this mean that von Philippovich, von Wieser etc. were not "true" Austrians either?
No, they were Austrians.
Lachmann is not a true Austrian because he rejects the praxeological foundation of economic phenomena, in favor of a hermeneutic framework.
It is the epic of all straw men to point to Austrian economists who are politically statist and then say "even these Austrian economists agree with me."
Austrian economics is value free. It is not a political doctrine, unlike Keynesian economics, which explicitly calls for and designs specific state interventions.
This article will help you understand what you currently don't:
ReplyDeletehttp://mises.org/journals/qjae/pdf/qjae3_2_2.pdf
E.g., in the words of Hayek, Wieser "in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice" (F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17).
ReplyDelete> More straw man fallacy."
Since the straw man fallacy means attributing to someone a position they don't hold, you're saying that either (1) Hayek never made this statement or (2) that Wieser did not in fact "pride himself that his theory of marginal utility had provided the basis of progressive taxation".
However, Hayek did make that statement, as you can verify for yourself here:
F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17.
And so can the statement that Wieser justified progressive taxation. Simply type the words "Wieser progressive taxation" into Google books and you'll even get Wieser's own writings on the subject.
E.g., in the words of Hayek, Wieser "in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice" (F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17).
ReplyDeleteMore straw man fallacy."
Since the straw man fallacy means attributing to someone a position they don't hold
No, that is just ONE FORM of the straw man fallacy. There are other forms of it. The other forms of it have to do with evading the original argument, and inventing a new one, then attacking it, even though one did not attribute that position to the person they are debating. The strong form of the straw man fallacy is to attribute a position to the person.
The weaker form is the one you keep committing. That is, the issue of the debate is one of economics, and you keep evading that context by invoking political positions of economists connected to the Austrian School and saying "even they agree with me." It's a straw man because the argument you are attacking is not the actual argument under discussion.
And so can the statement that Wieser justified progressive taxation.
Wieser TRIED to justify progressive taxation, but that doesn't mean he successfully justified it.
After all, Marx also tried justifying progressive taxation, and he failed to.
"That is, the issue of the debate is one of economics, and you keep evading that context by invoking political positions of economists connected to the Austrian School"
ReplyDeleteThere is no evasion.
Read the comments again properly. Wieser thought he had given an economic justification for progressive taxation by using marginal theory of value, not a moral/political justification. You can verify that for yourself here in Wieser's writings:
"The ultimate basis for any progressive rate of taxation is to be found in the general scale of desires. According to this basis the personal value of the money unit is appreciably higher for the) first thousand than for the second and is hardly to be compared with the appraisal in the case of the 99th or 100th thousand. Furthermore, the difference between the first and second thousand is appreciably greater than that between the 99th and 100th. Thus, all tendencies of the modern policy of taxation find a firm theoretical basis in the concept and laws of economic value."
Wieser, F. von. 2003 [1928]. Social Economics (trans. A. Ford Hinrichs), Routledge, London. p. 433.
"That is, the issue of the debate is one of economics, and you keep evading that context by invoking political positions of economists connected to the Austrian School"
ReplyDeleteThere is no evasion.
Then do what you have heretofore evaded to do, which is show EXACTLY how the introduction of multiple natural interest rates somehow invalidates the ABCT's core theory of inter-temporal discoordination, founded upon the framework of economic calculation.
You have shown not the faintest clue that you understand the concept of economic calculation, and yet you claim to have knowledge of a refutation of a theory that is based on it.
Wieser thought he had given an economic justification for progressive taxation by using marginal theory of value, not a moral/political justification.
No, Wieser STARTED with the premise that money and income are "collectively owned", and then utilized the law of diminishing marginal utility, which is individualist in foundation, in a fallacious way afterwords to justify his political ideology of progressive income taxation.
Starting and staying with a praxeological epistemology and ontology cannot, in fact, provide a foundation for any taxation whatsoever, let alone a progressive one.
Wieser made the error that folks like Rothbard and Reisman painstakingly pointed out as impossible, which is to compare and contrast utilities across individuals, to arrive at some sort of "collective" utility that is "higher" or "lower".
In reality however:
"Each individual person is an organism. Thus, each individual person constitutes a separate base and standard for judging utility. It is only to the individual human being that there can be utility, marginal utility, or any other kind of value."
"It is true that to one and the same person $1,000 would be of higher marginal utility if all he had was $10,000 than if he had $100,000. But it is a non sequitur and completely false to imply that the marginal utility of $1,000 to this individual is increased if, when he has $100,000, $1,000 is taken away and given to someone else, who has only $10,000. It is absurd to think that the eleventh $1,000 in the hands of someone else is of greater marginal utility to a person than the one-hundredth $1,000 in his own hands. And if it is not the marginal utility to this person, the man who has the $100,000, that is increased, then there is no universal, objective, or valid sense in which marginal utility could be increased by “redistribution.” Exactly the same point applies to “redistribution” in favor of those who appreciate and value things more highly on the basis of factors other than the smallness of the number of units they possess. It is no satisfaction to someone whose painting has been stolen that now it is in the collection of someone who looks at it more often and with greater pleasure than he, the owner, would. The most intense pleasure of the thief is of no account to the owner."
Reisman, George, "Capitalism", p 333.
"Wieser made the error that folks like Rothbard and Reisman painstakingly pointed out as impossible, which is to compare and contrast utilities across individuals..."
ReplyDeleteYou have merely re-enforced the fact that Wieser's differences with other modern Austrians are economic, and not as you previously said political.
Furthermore, the Lachmann wing's differences with other Austrians are economic.
There are deep divisions in the Austrian school over economics, and even deeper divisions in ideology concerning ethics and the role of state, banking etc.
In your comments above you said:
"There is just the Austrian school, and within the Austrian school, there are some minor disagreements on superficialities."
That claim that the differences are minor and only on "superficialities" is false.
"Wieser made the error that folks like Rothbard and Reisman painstakingly pointed out as impossible, which is to compare and contrast utilities across individuals..."
ReplyDeleteYou have merely re-enforced the fact that Wieser's differences with other modern Austrians are economic, and not as you previously said political.
There are political and economic disagreements, but the economics differences which separates Wieser from other Austrians are not sufficient to warrant the conclusion that Wieser was "fringe" the way Lachmann is fringe.
Wieser just made the same mistake that economists in pretty much all schools make, which is to compare and contrast utility across individuals. This doesn't make Wieser fringe however. It makes him different like Selgin and White are different from Block and Hoppe in the area of banking. All four are Austrian economists, but they disagree with some minor areas in economics and policy.
Lachmann adheres to what's considered the "radical subjectivist" wing of the Austrian school, and not the mainstream "moderate" subjectivism of Mises and Rothbard (or Selgin and White for that matter). In relation to other Austrians, Lachmann is so far removed that he is in a class on his own.
There are no radical subjectivist Austrians alive today, which is why I said that the Austrian school does not have a "neo" or "Post" or "New" wing. The differences among CURRENT Austrian economists are not significant.
Furthermore, the Lachmann wing's differences with other Austrians are economic.
Yes.
There are deep divisions in the Austrian school over economics, and even deeper divisions in ideology concerning ethics and the role of state, banking etc.
The divisions are not "deep", they are minor, but there are differences certainly. The dominant, mainstream Austrian economics today is Rothbardian, not Lachmannian. The number of Rothbardians dwarfs the number of people like Selgin, White, and Cowen (and certainly Lachmann, which no Austrian today adheres to as far as I know).
In your comments above you said:
"There is just the Austrian school, and within the Austrian school, there are some minor disagreements on superficialities."
That claim that the differences are minor and only on "superficialities" is false.
No, it is still true. What makes Austrians differ are their political views, which then influences their economic views, which then manifests a difference in economics but mostly politics.
"Garrison wasn't critiquing Post-Keynesianism, and stagflation cannot be explained by the GT. Since Keynes was wrong, his followers had to change the claims and form neo-Keynesianism. They were wrong too, so another change into New Keynesianism. They were wrong too, so another change into Post Keynesianism.
ReplyDeleteThere are so many different smells of Keynesianism because none of them are right. With so many X-Keynesianism doctrines, it is evidence that the core of Keynesianism is utterly flawed."
Post-Keynesian basically developed alongside neoclassical synthesis Keynesianism and New Keynesianism( which developed after New Classicals critiqued neo-Keynesianism.)
Post Keynesianism is not really something that came after New Keynesianism failed as you claim.
If we judge "Keynesianism" in the same manner as you judge "Austrianism" we'd have to conclude that the Post-Keynesians are the only true Keynesians and that the others who claim to be Keynesian are not truly Keynesians at all.
There are definitely distinctions among the Austrian economists. You either illogically ignore them or banish the Austrians who are too far form your ideal Austrian economics out of the club.
If we consider all of these economists who have considered themselves to be Austrians as Austrians as you would like to consider all the economists who have claimed to be Keynesians as Keynesians, then we must conclude that there is something wrong with the core of Austrian economics as it has been repeatedly changed over the last century.
Of course, you lack a sense of fair judgement and treat the dreaded Keynesians in a different manner than you treat your beloved Austrians.
"It makes him different like Selgin and White are different from Block and Hoppe in the area of banking. All four are Austrian economists,
ReplyDeleteFirst, Selgin no longer regards himself as an Austrian:
George Selgin: I no longer refer to or even think of myself as an Austrian economist, or as any sort of "free market" economist. If other people think I'm one of those things, that's fine - but I don't conduct my research with any thought of making such labels fit. There's a cost to this, of course: people may think I'm being ungrateful; and I certainly feel very lonely at times. But it's the only way I know in which to stay true to my values.
http://www.gold-speculator.com/appenzell-daily-bell/27167-george-selgin-austrian-finance-central-banks-virtues-free-banking.html
"All four are Austrian economists, but they disagree with some minor areas in economics and policy."
ReplyDeleteThe difference between (1) a free banking system with fractional reserve banking and (2) the fantasy Rothbardian world of 100% reserves is vast.
This is not by any means a "minor" difference.
"It makes him different like Selgin and White are different from Block and Hoppe in the area of banking. All four are Austrian economists,
ReplyDeleteFirst, Selgin no longer regards himself as an Austrian:
George Selgin: I no longer refer to or even think of myself as an Austrian economist, or as any sort of "free market" economist. If other people think I'm one of those things, that's fine - but I don't conduct my research with any thought of making such labels fit. There's a cost to this, of course: people may think I'm being ungrateful; and I certainly feel very lonely at times. But it's the only way I know in which to stay true to my values.
What people consider themselves as, and what they actually are regarding their ideas, are two different things.
"All four are Austrian economists, but they disagree with some minor areas in economics and policy."
ReplyDeleteThe difference between (1) a free banking system with fractional reserve banking and (2) the fantasy Rothbardian world of 100% reserves is vast.
Yes, there is a difference between Rothbardian 100% reserve banking a la 17th century Bank of Amsterdam, and fantasy Selginian world of free banking, but the difference is not vast, because they are both on the non-central bank side of the spectrum, which makes them very similar vis a vis central banking.
This is not by any means a "minor" difference.
False. Compared to central banking, they are relatively minor in difference. But compared to each other, they are still different.
And you're still evading showing EXACTLY how the introduction of multiple natural interest rates somehow invalidates the ABCT's core theory of inter-temporal discoordination, founded upon the framework of economic calculation.
You have shown not the faintest clue that you understand the concept of economic calculation, and yet you claim to have knowledge of a refutation of a theory that is based on it.
"And you're still evading showing EXACTLY how the introduction of multiple natural interest rates somehow invalidates the ABCT's core theory of inter-temporal discoordination"
ReplyDeleteYou've already been pointed to the work of Sraffa on that.
As for notions of inter-temporal discoordination - that requires notions of inter-temporal equilirbium, another irrelevant neoclassical concept that doesn't apply to the real world:
http://socialdemocracy21stcentury.blogspot.com/2011/06/hayek-on-flaws-and-irrelevance-of-his.html
Hayek’s trade cycle theory was a static equilibrium theory, and also assumes that all markets do in fact clear, partly by glossing over the role of uncertainty and assuming perfect foresight. But severe problems with Hayek’s static equilibrium theory had already emerged in the 1930s:
“by the middle of the 1930s, problems with [Hayek’s] static equilibrium theory had become ever more evident, as questions of the role of expectations came to the fore and, and, with them, the recognition that earlier models had assumed perfect foresight” (Caldwell 2004: 224).
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced” (Caldwell 2004: 228).
Yes, there is a difference between Rothbardian 100% reserve banking a la 17th century Bank of Amsterdam, and fantasy Selginian world of free banking, but the difference is not vast
ReplyDeleteSo, they're interchangeable then? Good to know.
I did not define what an Austrian is to you
I'm curious - can you rigorously define what Austrian means, and give a comprehensive list of theorists you consider strictly Austrian, and perhaps a list of who you think are fringe, and what makes them fringe? That would go a long way to making your case, I imagine.