In fact, their claims are false and misleading, as I have shown here:
“The US Recession of 1920–1921: Some Austrian Myths,” October 23, 2010.The following points should be made in response to them:
(1) The recession lasted from January 1920 to July 1921, or for a period of 18 months. This was a long recession by the standards of the post-1945 US business cycle, where the average duration of US recessions was just 11 months. The average duration of recessions in peacetime from 1854 to 1919 was 22 months, and the average duration of recessions from 1919 to 1945 was 18 months (Knoop 2010: 13). Therefore the recession of 1920–1921 was not even short by contemporary standards: it was of average length.It is the height of stupidity to claim that a recession that was ended partly by Federal Reserve intervention through interest rate lowering can be ascribed to the “free market,” or is a vindication of Austrian economics. Nor did the recession end “quickly,” either by contemporary or modern (post-1945) standards.
(2) The period of 1920–1921 was not a depression (a downturn where real GDP contracted by 10% or more): it was mild to moderate recession, with positive supply shocks. Christina Romer argues that actual decline in real GNP was only about 1% between 1919 and 1920 and 2% between 1920 and 1921 (Romer 1988: 109). So in fact real output moved very little, and the “growth path of output was hardly impeded by the recession” (Romer 1988: 108–112). The positive supply shocks that resulted from the resumption in international trade after WWI actually benefited certain sectors of the economy (Romer 1988: 111).
(3) there was no large collapsing asset bubble in 1920/1921, of the type that burst in 1929, which was funded by excessive private-sector debt;
(4) Because of (3) the economy was not gripped by the death agony of severe debt deflation in 1920-1921;
(5) There was no financial and banking crisis, as in 1929–1933;
(6) The US economy in fact had significant government intervention in 1921: it had a central bank changing interest rates. The Fed lowered rates and had a role in ending this recession: in April and May 1921, Federal Reserve member banks dropped their rates to 6.5% or 6%. In November 1921, there were further falls in discount rates: rates fell to 4.5% in the Boston, Philadelphia, New York, and to 5% or 5.5% in other reserve banks (D’Arista 1994: 62). By June 1922, the discount rate was lowered again to 4%, and the recovery gained momentum.
And there is yet another absurd contradiction here.
An Austrian cannot claim that the recession of 1920–1921 ended with a real and proper recovery. Why? The Fed lowered interest rates. Why did this not cause an Austrian trade cycle and unsustainable boom, distorting capital structure? If it did not, they must explain why the Fed’s lowering of interest rates did not make the market rate fall below the natural rate. How did the economy avoid distortions to its capital structure when it had a fractional reserve banking system and Fed inflating the money supply in 1921/22? How could there have been any real “recovery” in 1921?
In other words, by the Austrians’ own economic theory, the “recovery” of 1921 was no recovery at all: just the beginning of another Austrian business cycle!
D’Arista, J. W. 1994. The Evolution of U.S. Finance, Volume 1: Federal Reserve Monetary Policy: 1915–1935, M. E. Sharpe, Armonk, New York.
Knoop, T. A. 2010. Recessions and Depressions: Understanding Business Cycles (2nd edn), Praeger, Santa Barbara, Calif.
Romer, C. 1988. “World War I and the Postwar Depression: A Reinterpretation based on alternative estimates of GNP,” Journal of Monetary Economics 22.1: 91–115.
Since you fraudulently and always ignore the central concept of the Austrian School which is economic calculation and pricing by voluntary actors, your little narrative left out the most important facts regarding 1920 (and you have cause and effect backwards). Industrial production collapsed as did wages and prices. There were no programs I know of to preclude that deflation. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%. Government pending was slashed. In a deflationary situation, 7% and 6% interest rates are pretty high. The rates in 1921 were 7% until April, 6% until June and 5 ½% until September AFTER the recession been ongoing for quite awhile. I would argue that these very high rates also helped end the problem quickly.ReplyDelete
Between June 1930 and October 1931, the New York Fed had discount rates of 2.5% dropping to 1.5% for quite awhile and then back up to 2.5%.
That solved that asset deflation then, didn’t it? Fer sure.
It is precisely because there were no Hoover around to fight falling wages and prices and no one around to enact crazy debt and spending sprees that things ended so quickly in 1921. It was barely a blip on the historical radar BECAUSE so little was done. Nevertheless, there were serious problems of improper pricing (which is ALWAYS the culprit) caused by the prior government slaughterfest and which were resolved relatively quickly without Keynesian-style interference.
And yes, lower than natural interest rates will cause malinvestment. The cycles are caused by the mispricing of things by generic and ignorant humans searching desperately for the “natural” rate of interest and prices. Keynesian-style policies of whatever sub-cult impair that pricing process. Longer term and more complex investments will be impaired worse than short term and less complex investments. And you cannot bear to express the Austrian theory as propounded because it is so self-evidently true that you will lose the argument just by stating it properly.
"And yes, lower than natural interest rates will cause malinvestment... "ReplyDelete
Your comments are a waffle of red herrings and assertions without evidence.
No major assertion above has been refuted.
The question remains: why didn't the lowering of rates by the Fed induce an ABCT?
Even the real interest rate fell in July 1921, and continued to fall to the end of the year, and in the next, precisely when the recovery happened. The economy hit its trough in July 1921: the expansion began in August 1921. By 1922 as the recovery gathered pace and both nominal rates were lowered by the regional Feds even further and the real interest rate plunged to 9.11% (in June 1922) from 15.55% (January, 1922).
New York Fed
The real rate did indeed soar in 1921, but not as high as it did in 1920. It fell from July 1921, just as the trough hit and recovery began.
Unless you believe lower rates have zero effect on investment, there's no argument here.
"Industrial production collapsed as did wages and prices. .... etcReplyDelete
Modern research shows real GNP dropped by about 1% between 1919 and 1920 and 2% between 1920 and 1921 (Romer 1988: 109) - this a mild/moderate recession, not a depression. Positive supply shocks helped certian sectors. Deflation was severe, but in fact it was expected.
"I would argue that these very high rates also helped end the problem quickly."
That the recession ended "quickly" is pure and unadultered nonsense: 18 months was AVERAGE by the standard of that era, and quite LONG by the standards of the post-1945 US business cycle.
I seem to recall a few new problems appearing about 7 or 8 years after this problem seemed to be resolved.ReplyDelete
"Quickly" is relative. It was certainly much quicker than the 15 year death spiral of 1929-1945. These other recessions you cite didn't have to deal with such major re-pricing issues made necessary by the various government controls enacted in suppport of its slaughterfest.
I repeat, the question remains: why didn't the lowering of rates by the Fed induce an Austrian trade cycle?? How did the economy avoid distortions to its capital structure when it had a fractional reserve banking system and Fed inflating the money supply in 1921/22?? How could there have been any real "recovery" in 1921?ReplyDelete
Your embarrassing refusal to even address that speaks volumes.
"It was certainly much quicker than the 15 year death spiral of 1929-1945."
The Great Depression ran from 1929-1933. From 1933 there was a recovery which continued until Roosevelt cut spending in 1936 causing another recession in 1937. That was already pointed out to you in a previous post too.
Your nonsense is laughable.
The Great Depression ran from 1929-1933. From 1933 there was a recovery which continued until Roosevelt cut spending in 1936 causing another recession in 1937. That was already pointed out to you in a previous post too.ReplyDelete
I disagree. Your recovery was phony and collapsed like a house of cards. Prosperity didn't return until spending was slashed after WWII.
We already know economic principles and how they express themselves. Your out-of-context historical anecdotes don't change those principles. And your continuous avoidance of the centrality of the pricing process to everything is dishonest.
How could there have been any real "recovery" in 1921?
People did the best they could. There was significant re-pricing that occurred but a new round of malinvestments were just beginning. Read the Rothbard link. The key to understanding historical events is to know what you are looking for.
"There was significant re-pricing that occurred but a new round of malinvestments were just beginning."ReplyDelete
In other words: under ABCT, there was no REAL recovery, just another cycle of malinvestment. Yet Austrians are forever claiming this recession proves that "do nothing" leads to real and unsustainable recovery.
This is quite an admission.
The less interference that there is in pricing and re-pricing, the fewer problems are caused by the interference and quicker problems are resolved. There was less inference in 1920-1921 than in 1929-1933 which is not a controversial statement. Due to less interference, you had a 2 year problem, not a 15 year problem.ReplyDelete
Keynesian policies consist of nothing but interference in the pricing process.
There is no admission of anything here. As the government interferes with pricing, especially the central bank and its diluted funny money, things are mis-priced and the economy goes to hell until real pricing can be established or reestablished (which is always painful and problematic). The business cycle theory is a corollary of these basic concepts. These concepts are not that complicated and there has been no changing of the narrative to fit events. It’s the same explanation that I’ve understood since 1973. For whatever reason, no non-Austrian ever comprehends the pricing process. And you don’t either.
"There is no admission of anything here. As the government interferes with pricing, especially the central bank and its diluted funny money, things are mis-priced and the economy goes to hell"ReplyDelete
So the economy in 1921-1922 went to hell? It must have done: there was a central bank engaging in open market operations, lowering interest rates, and allowing the FR banking system to inflate the money supply.
So again: invoking 1921-1922 as a successful recovery from recession by "doing nothing" is totally false: the government wasn't "doing nothing"; it was inflating the money supply causing an ABC.
I have a feeling technological advancements were at least partly responsible for the differences in the length of recessions.ReplyDelete
Oh, I know the answer! All the Austrians have to do is just discount unemployment numbers as a meaningless statistic, just like they do with GDP. After all, if you can't use them fancy maths and numbers, then the one-man developed axiom can never be proven wrong! If that doesn't work, then we'll just throw in some meaningless Rothbard links as well.ReplyDelete
On a slightly more serious note, I agree that the Fed's rate cutting played a huge role in ending it. From the Friedman side, there is an argument that the Fed may have caused it in the first place, but it certainly corrected for it with its monetary stimulus.
"All the Austrians have to do is just discount unemployment numbers as a meaningless statistic, just like they do with GDP"ReplyDelete
Oh!! So GDP is meaningful, is it? Interesting.
"After all, if you can't use them fancy maths and numbers, then the one-man developed axiom can never be proven wrong!"
Why do you whatever-Keynesians always sound like sulking children throwing a tantrum because they can't have their cake and eat it as well?
On a more serious note, why don't you disprove the statement 'Man acts'? Given that action is defined as the purposeful striving towards ends, it should be extremely easy for you to find arguments and data to disprove it and its logical corollaries. Go ahead. Give it a shot. I promise not to laugh.
"On a more serious note, why don't you disprove the statement 'Man acts'? Given that action is defined as the purposeful striving towards ends, ... "ReplyDelete
Because there is no need to "disprove" it, as carefully explained here:
If you define "rational" as "purposeful," then the statement "all action is rational because all action is by definition purposeful” is a tautologically true analytic statement.
But even its a priori status is disputed by other Austrians: Rothbard thought its truth was "broadly empirical" (Rothbard, 1976, "Praxeology: The Methodology of Austrian Economics," in Edwin G. Dolan (ed.), The Foundations of Modern Austrian Economics, Sheed, Kansas City. pp. 24-28).
Moreover, it, as a proposition, can be held as true by Communists, Marxists, New Classicals, Keynesians, monetarists etc, without any contradiction of their theories.
Basically, the demand that someone "disprove" it is as utterly pointless as my demanding that an Austrian "prove" that the sky isn't blue on a clear day.
Go on, disprove it!! I promise not to laugh.
If you define "rational" as "purposeful," then the statement:
"all action is rational, because all action is by definition purposeful”
is a tautology in the sense that the subordinate clause "because all action is by definition purposeful" is redundant.
The statement just reduces to:
"all action is purposeful.”
If this is supposed to mean all conscious, voluntary action by non-mentally-ill human beings has a purpose, then, yes, it appears to be a trivially true statement.
Mises thought that the human action axiom was a synthetic a priori proposition (Mises 1962: 8), but the very existence of such a class of propositions is vigorously disputed even within modern philosophy and philosophy of logic.
Others argue that it is a synthetic statement, whose truth is established a posteriori (by empirical evidence). As Rothbard says, its truth was "broadly empirical" (Rothbard, 1976, "Praxeology: The Methodology of Austrian Economics," in Edwin G. Dolan (ed.), The Foundations of Modern Austrian Economics, Sheed, Kansas City. pp. 24-28).
To show it is false, you would have to find one example of a conscious, voluntary action by a non-mentally-ill human being that has no purpose, or no end intended.
someone commented on the "deflationary growth" episodes in the nineteenth century. You seem to not want to respond(its your blog, but do you even have on argument?) the proposition by Rothbard and other Austrians being not that demand side and supply side deflation are the same, but that Keynesians and Monetarists almost totally ignore "good" deflation from positive productivity and supply shocks. Rothbard is quoted on a wikipedia entry questioning the length and severity of the Long Depression because of "good" deflation. Austrians seem to also think that the natural state of a capitalist economy is "good deflation"
What are your thoughts?
"Rothbard is quoted on a wikipedia entry questioning the length and severity of the Long Depression because of "good" deflation."ReplyDelete
It has been known for a long time that the long depression from 1873-1896 was a period of successive business cycles (with overall price deflation) where real GNP in all countries in 1896 was much higher than in 1873. It wasn't a period of continous economic contraction.
It perfectly possible to have an expansion in the business cycle where deflation also occurs.
I remain unconvinced that deflation even in these scenarios is a good thing, for these reasons:
(1) unless it is expected and anticipated, it can have debt deflationary effects, hurting the producers of commodities who are actually increasing wealth: as their debts are paid back in money of higher value.
(2) deflation in many periods has hurt business confidence and probably adversely influences investment.
If one bothers to look at contemporary accounts of the long depression (1873-1896) one finds numerous complaints of debt deflation and pessimistic business expectations.
Outside 1873-1896 most booms in the 19th century were inflationary anyway: this is what business expected, and it was a shock to them to see deflation going on for years.
In short, even the alleged "good" deflation isn't even necessarily good at all.
I asked this whole question because from a Keynesian standpoint, "good" deflation seems to be something of a puzzle and mystery. Incidently if you factor in the effects of "good deflation in the U.S. you get REAL GNP per capita growth (not nominal) higher than even the postwar period. A problem for people like us who admire the postwar record. But thanks for addressing this issue which other Keynesians seem to ignore,
In the case of the UK, the best that studies can show is that growth of GNP was not "out of line with previous periods." (Burdekin and Siklosp, p. 63). Other studies suggest a deceleration of growth in the 1870s onwards (Crouzet, p. 53).ReplyDelete
That is nothing much to boast about, given that growth rates under the era of classical Keynesian were far better than the 19th century.
The business cycle had 3 recessions:
Now these are older figures, and any data for 19th century business cycles are far from certain, but I don't regard 3, 4 and 6 year recessions as anything but a disaster.
In terms of unemployment, there were 3 years when it went above 9% and the average was 5% - 5% is a considerable amount of involuntary unemployment and a lost opportunties of growth.
R. C. K. Burdekin and P. L. Siklos, Deflation: current and historical perspectives p. 63ff.
François Crouzet, The Victorian economy, p. 53
"Incidently if you factor in the effects of "good deflation in the U.S. you get REAL GNP per capita growth (not nominal) higher than even the postwar period.ReplyDelete
It isn't a problem: the US had huge natural resources to exploit and massive immigration in the 19th century, and these new people entered the economy boosting economic activity and growth. Also, the US was one of the most protectionist nations in the world in the 19th century, its manufacuring sector developed behind high tariff walls, and it had access to European technology and capital.
"In terms of unemployment, there were 3 years when it went above 9% and the average was 5% - 5% is a considerable amount of involuntary unemployment and a lost opportunties of growth."
I wasn't speaking of unemployment. i was speaking about productivity. If you want to argue about whether or not unemployment was better in the postwar period or the nineteenth century, I would wholeheartedly agree that employment wise the postwar period was far kinder in recession duration and unemployment to the common man
But productivity is a different matter. The difference between automobiles and say, horse drawn carriages is vast. whereas the postwar period saw incremental improvements not massive gargantuan gamechangers. You would have had to have invented flying cars and personal computers and the internet in the 50's and sixties to get the same rate of marginal productivity growth in the nineteenth century.
"It isn't a problem: the US had huge natural resources to exploit and massive immigration in the 19th century, and these new people entered the economy boosting economic activity and growth. Also, the US was one of the most protectionist nations in the world in the 19th century, its manufacuring sector developed behind high tariff walls, and it had access to European technology and capital"
I'm deeply skeptical of the tariffs helped american industry argument. I'm a krugmanite free trader, in the sense that i appreciate free trade with qualifications. You neglect economic geography, the u.s. was separated by two oceans, that seems to be as much of a home court advantage issue than a tariff one. Also tariffs were really the only significant source of revenue of the us federal government in the post Civil War period nineteeth century period. The mere fact that they collected revenue AT ALl mean that at least SOME foreign goods were sold. Does that sound like the most "protectionist policy in the world?"Also as you note, European FDI formed a big part of the American growth story, isn't protectionism supposed to be (partially) about limiting foreign inflows of capital?
"You neglect economic geography, the u.s. was separated by two oceans, that seems to be as much of a home court advantage issue than a tariff one"ReplyDelete
Geography still didn't protect many sectors of US industry. See:
Mark Bils, “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” Journal of Economic History 44 (December 1984): 1033–1045.
Mark Bils concludes:
"Cotton textiles constituted nearly two-thirds of value added in large-scale manufacturing in New England in the 1830s. The removal of the tariff, according to my results, would have reduced value added in textiles by, at a minimum, three-quarters. The implication is that about half of the industrial sector of New England would have been bankrupted.
"isn't protectionism supposed to be (partially) about limiting foreign inflows of capital? "
In a word: no.
It is about creating industry capable of competing on world markets.
"Oh!! So GDP is meaningful, is it? Interesting."ReplyDelete
Yes, many financial institutions in this country do find it useful. If GDP is such a bad indicator, then where are all of the private institutions developing their own equivalent to it?
"Why do you whatever-Keynesians always sound like sulking children throwing a tantrum because they can't have their cake and eat it as well?"
Who said anything about sulking children? When your entire economic theory places political viewpoints first and research second (or in this case, none), what do you think is going to happen? You can't describe something as being self-evident without testing your theory first. In the case of economics, that's where data gathering comes into play, which develops into statistical analysis and mathematical modeling. This isn't "statist propaganda", that is just how the world works. Even the neo-classical school has changed some of its viewpoints over time as the data shows different results. The Austrian school has remained largely unchanged and won't ever include evidence that may contradict libertarianism.
In addition, despite calling itself logical, the libertarian school attracts a lot of strange ideas such as 9/11 truthers and illumanti conspiracies.
"On a more serious note, why don't you disprove the statement 'Man acts'? Given that action is defined as the purposeful striving towards ends, it should be extremely easy for you to find arguments and data to disprove it and its logical corollaries. Go ahead. Give it a shot. I promise not to laugh."
So what happens when that said "action" is not purposeful? The instant that somebody acts irrational (such as not being knowledgeable about the product they are buying or commiting aggression against someone), then the entire argument falls apart. An easy example is habitual behavior, where someone constantly makes the same choices regardless of what benefit they see in doing so.
""Oh!! So GDP is meaningful, is it? Interesting.""ReplyDelete
If GDP/GNP are not meaningful, then many Austrian arguments totally collapse:
(1) there would be no way to know if there was a recovery in 1921 or even a recession from 1920-1921.
(2) They could not try and point to the growth rates in the 19th century as any vdication of a less intervention system over Keynesian systems.
(3) they cannot claim that "Keynesianism" caused 2008-2009 recessions in many countries: if GNP/GDP is meaningless or invalid, how would they even know that there were any recessions at all?
(4) they could never identify any periods when their beloved Autrian business cycles occur, as would never even know if real output was declining or not.
"So what happens when that said "action" is not purposeful? The instant that somebody acts irrational "ReplyDelete
As I have said above in more detail, the Austrians define "rational" as "purposeful". Their statement:
"all action is rational, because all action is by definition purposeful”
is a tautology in the sense that the subordinate clause "because all action is by definition purposeful" is redundant.
The statement just reduces to:
"all action is purposeful.”
That statement is trivially true - and presents no problem whatsoever to Keynesian/progressive economics.
Ah, I see. Thanks for pointing that out!ReplyDelete
While I am no Austrian I will be fair on one point...I thought they DO claim the "recovery" was indeed another Austrian business cycle. That was Rothbard's book, that Fed policy caused the 20s boom to be big and etc etcReplyDelete
I haven't read his book in years and I didn't pay super great attention since at the time I was an Austrian and just believed whatever they said on faith. So I don't know what Rothbard said about the 20-21 recession, but I do believe they claim it was another bubble...
Of course this means you are correct still: By claiming the 20s fed policy was too loose, it implies the Fed helped us out of the 1920 recession, thus not a "free market" recovery.
I admit, when I flirted with Austrian thought I said "Ah but it was still a recovery without FEDERAL gov spending. No welfare, or automatic stabilizers, or stimulus" Of course I learned some history and saw this was also wrong, since Harding signed Tariffs in response, which is a major Austrian no no so yeah, all arguments fail the reality test lol
I just took the 20-21 recession as the final adjustment from WWI, the natural progress we take after a major war, like how in my opinion we had the 1949 recession which was the final adjustment from WWII and the start of a market "true" recovery" yeah no way around it Austrians, the ideology falls all tests!
Anonymous@November 12, 2014 at 10:10 AM,Delete
yes, I think you are right: Rothbard did say that the recovery by 1922-1923 was a "false" one induced Fed monetary policy, but the modern Austrians have conveniently forgotten this.