Wednesday, June 20, 2012

Some Links on Austrian Economics

Here is a sample of interesting links (some old, some new) I have seen recently on Austrian economics:
(1) Edward Feser, “Rothbard Revisited,” August 23, 2009.
Edward Feser replies to Gerard Casey’s defence of Murray Rothbard as a philosopher.

(2) Lorenzo, “About Austrian Economics,” Critical Thinking Applied, April 24th, 2012.
An interesting critique of Austrian economics.

(3) Steven Horwitz, “Some Thoughts on Lorenzo on Austrian Economics,” Critical Thinking Applied, June 18th, 2012.
Steven Horwitz responds to the original critique in link (2) above.


  1. Have you read Dave Prychitko's recent article containing containing the FIH? What are your thoughts on it if you have ? I'm about half way through the article

    1. You mean this?:

      Prychitko, D. 2010. "Competing Explanations of the Minsky Moment: The Financial Instability Hypothesis in Light of Austrian Theory," The Review of Austrian Economics 23: 199–221.

  2. Anyway, I'll assume you mean this article.

    It's an interesting enough article, but I take issue with Prychitko's interpretation of Post Keynesian policy prescriptions.

    On p. 218, he misses the point that effective and careful regulation of the financial markets - stopping reckless lending to speculators and stopping serious asset bubbles before they happen - was already a fundamental Post Keynesian policy prescription long before the 1990s.

    This Wray's interpretation of the origins of the 2000s financial crash is in no sense some sudden change in Post Keynesian arguments of what happened or "post hoc ergo propter hoc reasoning" (Prychitko, p. 218) at all.

    Prychitko accuses Wray of misinterpreting "the past decade as a return toward an
    unhampered market economy." That is just a straw man: nobody says that the 1980s-2000s saw a creation of some Austrian fantasy world of anarcho-capitalism or Misesian classical liberalism. The point is that the economic system that existed from 1940s-1970s was modified and attacked by New Classical, monetarists and neoliberal ideologues after about 1980, and was made deeply dysfunctional.

    It was made relatively more laissez faire than what preceded it - not made an "unhampered market economy".

    As for relative financial deregulation, the acts that did so are easy to list:

    Depository Institutions Deregulation and
    Monetary Control Act (1980)

    Garn–St. Germain Depository Institutions Act (1982)

    These were major contributors to the Savings and Loan crisis.

    Further neoliberal acts that attacked Roosevelt’s system:

    Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)

    Financial Services Modernization Act of (1999), also called the Gramm-Leach-Bliley Act

    Commodity Futures Modernization Act (2000).

    The SEC’s Voluntary Regulation Regime for Investment Banks (2004)

  3. It's also strange to see Prychitko complain that the FIH is not a general theory of business cycles (p. 220), when even prominent Austrians like Kirzner and Lachmann never thought that the ABCT was a universal theory of cycles either:

  4. And, needless to say, Prychitko's attempt to defend the ABCT (pp. 212-217) doesn't convince me.

    Time preference theory of interest rates is false. Prychitko even uses the imaginary, non-existence natural rate of interest ("To Mises, borrowing from Wicksell, the so-called natural rate of interest has fallen", p. 213).

    The US economy already had enormous slack in the early 2000s and the ability to import goods, there is no reason why credit infusions would cause an unsustainable and serious distortion of the capital structure.

    Prychitko also manages to commit the most astonishing distortion of what happened in the 2000s:

    "During those years, credit-induced demands for new homes caused a doubling of their values—an historically unprecedented event. The housing industry, of course, is a
    latticework of timely production projects and draws a wide variety of specific (yet
    complementary) higher-ordered inputs into the housing market."
    (p. 215).

    The new housing component of the boom is greatly exaggerated: many of the mortgages in loans in the 2000s were refinancing and home equity loans, and the money obtained from the debt not used for new housing construction at all, but to pay credit card debt down or purchase more consumer goods.

    Even a Austrian like Robert Blumen understands this:

    Robert Blumen, “Fannie Mae Distorts Markets,” Mises Daily, June 17, 2002.

    In the 2000s the economic effect of the subprime loans (such as liar’s loans or NINJA loans), where people used their houses as ATMs, was an asset bubble in housing, from which exotic CDOs were created. These effects – essentially caused by consumer loans – are clearly very different from the alleged distortions of capital structure imagined in the ABCT. Even if we assume that alleged unsustainable capital structure distortions occurred, they would be swamped by effects coming from consumer credit expansion to asset bubble speculation, the financial effects of bank loading up on CDOs, MBSs, CDSs, and then debt deflation.

  5. I have written these comments above into a post here: