Robert Murphy defends the ABCT – even though he doesn’t accept the Wicksellian Natural Rate of Interest

When Austrians (metaphorically) shoot themselves in the foot, the results are usually amusing.

We are treated to just such a delightful spectacle here:

Robert P. Murphy, “Mises and the Market,” Dailycaller.com, 26th August, 2015.
http://dailycaller.com/2015/08/26/mises-and-the-market/

This is Robert Murphy’s defence of the Austrian business cycle theory (ABCT) as an explanation of recent global turmoil on stock markets and other economic problems.

The astute reader will notice that in the course of the article Murphy casually mentions the Wicksellian natural rate of interest as the foundation of the ABCT.

But wait a minute … Isn’t Robert Murphy the author of this paper called “Multiple Interest Rates and Austrian Business Cycle Theory”?

In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

And now the crucial quotation from Murphy:

“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to ‘the’ natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below ‘the’ natural rate, because there is no such thing.”
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).

So in print before our eyes Murphy has rejected the Wicksellian natural rate of interest – a “natural” and market rate of interest that would equilibrate savings and investment. We can add to this the rather embarrassing point that Murphy also agrees with Keynes that interest rates are a monetary phenomenon and a great part of Murphy’s PhD is devoted to defending a monetary theory of interest (as opposed to the Wicksellian theory).

But his recent defence of the ABCT just assumes that such a single Wicksellian natural rate of interest exists and doesn’t even mention his own rejection of the concept.

Is Murphy capable of explaining to us why the classical Austrian business cycle theory doesn’t collapse to its foundations if the natural rate is untenable as argued in his paper “Multiple Interest Rates and Austrian Business Cycle Theory”? Isn’t this massive hypocrisy on his part?

There are also a couple of other points I can’t resist addressing. Murphy in his article states the following:

“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.

Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.”
Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

This is of course a claim from the classical ABCT: that artificially low interest rates drive excessive investment and create massive malinvestment leading to real capital scarcity and shortages and in some cases actually lack of resources to finish projects.

Anyone can see that this is a bizarrely – if not insanely – inaccurate description of capitalist economies since 2008, where there was massive idle resources, huge unemployment and significant unused industrial capacity.

It is also especially laughable because right after the quotation above, Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged malinvestment by industrial firms or in real capital projects.

All in all, the Austrian story on modern capitalism is refuted by the empirical evidence and in Murphy’s case refuted by his own previously expressed ideas on the non-existence of the natural rate of interest.

Further Reading
“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Daniel Kuehn on the Austrian Business Cycle Theory,” December 5, 2013.

“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.

“How did Wicksell, the early Austrians and Keynes define the Natural Rate of Interest?,” October 4, 2014.

“Another Example of Wicksell’s Second Definition of the Natural Rate of Interest,” October 8, 2014.

“My Posts on the Natural Rate of Interest,” November 19, 2014.

BIBLIOGRAPHY
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
http://consultingbyrpm.com/uploads/Dissertation.pdf

Murphy, Robert P. 2011. “Is Keynes from Heaven or Hell,” 7 July.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html

Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

Hayek’s Prices and Production (1935), Lecture III: A Summary

I summarise below Lecture III of Hayek’s Prices and Production (2nd edn.; 1935), the classic work where Hayek developed his version of the Austrian business cycle theory (ABCT). I use the second, revised edition of 1935 (the first edition was published in 1931).

Hayek has a long analysis of the prices of intermediate goods in different stages of production (Hayek 1935: 70–83).

If money supply is increased by banks and the rate of interest falls below the natural rate (Hayek 1935: 86; and Hayek specifically states that in equilibrium the rate of return on capital is equal to the interest rate [Hayek 1935: 73]) and credit is obtained by producers, then Hayek’s Austrian business cycle is initiated:

“Now the borrowers can only use the borrowed sums for buying producers’ goods, and will only be able to obtain such goods (assuming a state of equilibrium in which there are no unused resources) by outbidding the entrepreneurs who used them before. At first sight it might seem improbable that these borrowers who were only put in a position to start longer processes by the lower rate of interest should be able to outbid those entrepreneurs who found the use of those means of production profitable when the rate of interest was still higher. But when it is remembered that the fall in the rate will also change the relative profitableness of the different factors of production for the existing concerns, it will be seen to be quite natural that it should give a relative advantage to those concerns which use proportionately more capital. Such old concerns will now find it profitable to spend a part of what they previously spent on original means of production, on intermediate products produced by earlier stages of production, and in this way they will release some of the original means of production they used before. The rise in the prices of the original means of production is an additional inducement. Of course it might well be that the entrepreneurs in question would be in a better position to buy such goods even at the higher prices, since they have done business when the rate of interest was higher, though it must not be forgotten that they too will have to do business on a smaller margin. But the fact that certain producers’ goods have become dearer will make it profitable for them to replace these goods by others. In particular, the changed proportion between the prices of the original means of production and the rate of interest will make it profitable for them to spend part of what they have till now spent on original means of production on intermediate products or capital. They will, e.g., buy parts of their products, which they used to manufacture themselves, from another firm, and can now employ the labour thus dismissed in order to produce these parts on a large scale with the help of new machinery. In other words, those original means of production and non-specific producers’ goods which are required in the new stages of production are set free by the transition of the old concerns to more capitalistic methods which is caused by the increase in the prices of these goods. In the old concerns (as we may conveniently, but not quite accurately, call the processes of production which were in operation before the new money was injected) a transition to more capitalistic methods will take place; but in all probability it will take place without any change in their total resources: they will invest less in original means of production and more in intermediate products.

Now, contrary to what we have found to be the case when similar processes are initiated by the investment of new savings, this application of the original means of production and non-specific intermediate products to longer processes of production will be effected without any preceding reduction of consumption. Indeed, for a time, consumption may even go on at an unchanged rate after the more roundabout processes have actually started, because the goods which have already advanced to the lower stages of production, being of a highly specific character, will continue to come forward for some little time. But this cannot go on. When the reduced output from the stages of production, from which producers’ goods have been withdrawn for use in higher stages, has matured into consumers’ goods, a scarcity of consumers’ goods will make itself felt, and the prices of those goods will rise. Had saving preceded the change to methods of production of longer duration, a reserve of consumers’ goods would have been accumulated in the form of increased stocks, which could now be sold at unreduced prices, and would thus serve to bridge the interval of time between the moment when the last products of the old shorter process come on to the market and the moment when the first products of the new longer processes are ready. But as things are, for some time, society as a whole will have to put up with an involuntary reduction of consumption.” (Hayek 1935: 86–88).

This is a curious aspect of Hayek’s theory: according to Hayekian ABCT, there will be, as investment in higher stages of production proceeds, a “scarcity of consumers’ goods” and “the prices of those goods will rise.” It is not clear whether this means an actual fall in real consumption, or merely excess demand in relation to supply and rising prices.

As an aside, in Mises’ version of the ABCT there does appear to be a contraction of consumer goods output in the later stages of the boom:

“The situation is as follows: despite the fact that there has been no increase of intermediate products and there is no possibility of lengthening the average period of production, a rate of interest is established in the loan market which corresponds to a longer period of production; and so, although it is in the last resort inadmissible and impracticable, a lengthening of the period of production promises for the time to be profitable. But there cannot be the slightest doubt as to where this will lead. A time must necessarily come when the means of subsistence available for consumption are all used up although the capital goods employed in production have not yet been transformed into consumption goods. This time must come all the more quickly inasmuch as the fall in the rate of interest weakens the motive for saving and so slows up the rate of accumulation of capital. The means of subsistence will prove insufficient to maintain the labourers during the whole period of the process of production that has been entered upon. Since production and consumption are continuous, so that every day new processes of production are started upon and others completed, this situation does not imperil human existence by suddenly manifesting itself as a complete lack of consumption goods; it is merely expressed in a reduction of the quantity of goods available for consumption and a consequent restriction of consumption. The market prices of consumption goods rise and those of production goods fall.” (Mises 2009 [1953]: 362–363).

To return to Hayek’s version of ABCT, he continues:

“But this necessity will be resisted. It is highly improbable that individuals should put up with an unforeseen retrenchment of their real income without making an attempt to overcome it by spending more money on consumption. It comes at the very moment when a great many entrepreneurs know themselves to be in command—at least nominally—of greater resources and expect greater profits. At the same time incomes of wage earners will be rising in consequence of the increased amount of money available for investment by entrepreneurs. There can be little doubt that in the face of rising prices of consumers’ goods these increases will be spent on such goods and so contribute to drive up their prices even faster. These decisions will not change the amount of consumers’ goods immediately available, though it may change their distribution between individuals. But—and this is the fundamental point—it will mean a new and reversed change of the proportion between the demand for consumers’ goods and the demand for producers' goods in favour of the former. The prices of consumers’ goods will therefore rise relatively to the prices of producers’ goods. And this rise of the prices of consumers’ goods will be the more marked because it is the consequence not only of an increased demand for consumers’ goods but an increase in the demand as measured in money. All this must mean a return to shorter or less roundabout methods of production if the increase in the demand for consumers' goods is not compensated by a further proportional injection of money by new bank loans granted to producers. And at first this is probable. The rise of the prices of consumers’ goods will offer prospects of temporary extra profits to entrepreneurs. They will be the more ready to borrow at the prevailing rate of interest. And, so long as the banks go on progressively increasing their loans it will therefore, be possible to continue the prolonged methods of production or perhaps even to extend them still further. But for obvious reasons the banks cannot continue indefinitely to extend credits; and even if they could, the other effects of a rapid and continuous rise of prices would, after a while, make it necessary to stop this process of inflation.” (Hayek 1935: 88–90).

So as the wages of workers are bid up, the process by which consumer goods’ prices rise is accelerated. So it seems that a crisis of inflation marks the shift to the “bust” (Hayek 1934 is an earlier discussion of how the boom turns into a bust).

We can trace the steps by which the boom turns into the bust:

(1) when the banks cease to advance new loans and the money rate of interest rises, the demand for producers’ goods falls, but demand for consumers goods will continue to increase for some time, as they “lag somewhat behind the additional expenditure on investment which causes the increase of money incomes” (Hayek 1935: 90–91);

(2) producers will want to shift back to producing consumer goods at the lower stages of production, but that process causes the bust:

“Very soon the relative rise of the prices of the original factors and the more mobile intermediate products will make the longer processes unprofitable. The first effect on these processes will be that the producers’ goods of a more specific character, which have become relatively abundant by reason of the withdrawal of the complementary non-specific goods, will fall in price. The fall of the prices of these goods will make their production unprofitable; it will in consequence be discontinued. Although goods in later stages of production will generally be of a highly specific character, it may still pay to employ original factors to complete those that are nearly finished. But the fall in the price of intermediate products will be cumulative; and this will mean a fairly sudden stoppage of work in at least all the earlier stages of the longer processes.

But while the non-specific goods, in particular the services of workmen employed in those earlier stages, have thus been thrown out of use because their amount has proved insufficient and their prices too high for the profitable carrying through of the long processes of production, it is by no means certain that all those which can no longer be used in the old processes can immediately be absorbed in the short processes which are being expanded. Quite the contrary; the shorter processes will have to be started at the very beginning and will only gradually absorb all the available producers’ goods as the product progresses towards consumption and as the necessary intermediate products come forward. So that, while, in the longer processes, productive operations cease almost as soon as the change in relative prices of specific and non-specific goods in favour of the latter and the rise of the rate of interest make them unprofitable, the released goods will find new employment only as the new shorter processes are approaching completion. Moreover, the final adaptation will be further retarded by initial uncertainty as regards the methods of production which will ultimately prove profitable once the temporary scarcity of consumers’ goods has disappeared. Entrepreneurs, quite rightly, will hesitate to make investments suited to this overshortened process, i.e., investments which would enable them to produce with relatively little capital and a relatively great quantity of the original means of production.” (Hayek 1935: 92–93).

So now the process shifts to the bust.

(3) Hayek sees the explanation of unused resources as the great achievement of his ABCT:

“Here then we have at last reached an explanation of how it comes about at certain times that some of the existing resources cannot be used, and how, in such circumstances, it is impossible to sell them at all—or, in the case of durable goods, only to sell them at very great loss. To provide an answer to this problem has always seemed to me to be the central task of any theory of industrial fluctuations; and, though at the outset I refused to base my investigation on the assumption that unused resources exist, now that I have presented a tentative explanation of this phenomenon, it seems worth while, rather than spending time filling up the picture of the cycle by elaborating the process of recovery, to devote the rest of this lecture to further discussion of certain important aspects of this problem. Now that we have accounted for the existence of unused resources, we may even go so far as to assume that their existence to a greater or lesser extent is the regular state of affairs save during a boom. And, if we do this, it is imperative to supplement our earlier investigation of the effects of a change in the amount of money in circulation on production, by applying our theory to such a situation. And this extension of our analysis is the more necessary since the existence of unused resources has very often been considered as the only fact which at all justifies an expansion of bank credit.” (Hayek 1935: 97–98).

At this point Hayek now considers situations where unused resources exist “to a greater or lesser extent” as a “regular state of affairs save during a boom”:

“If the foregoing analysis is correct, it should be fairly clear that the granting of credit to consumers, which has recently been so strongly advocated as a cure for depression, would in fact have quite the contrary effect; a relative increase of the demand for consumers’ goods could only make matters worse. Matters are not quite so simple so far as the effects of credits granted for productive purposes are concerned. In theory it is at least possible that, during the acute stage of the crisis when the capitalistic structure of production tends to shrink more than will ultimately prove necessary, an expansion of producers’ credits might have a wholesome effect. But this could only be the case if the quantity were so regulated as exactly to compensate for the initial, excessive rise of the relative prices of consumers’ goods, and if arrangements could be made to withdraw the additional credits as these prices fall and the proportion between the supply of consumers’ goods and the supply of intermediate products adapts itself to the proportion between the demand for these goods. And even these credits would do more harm than good if they made roundabout processes seem profitable which, even after the acute crisis had subsided, could not be kept up without the help of additional credits. Frankly, I do not see how the banks can ever be in a position to keep credit within these limits.

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit-expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for Consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending. If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to ‘mobilise’ all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

(10) And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come.” (Hayek 1935: 97–99).

It is here that Hayek earned his reputation as a liquidationist: for he says clearly that “we can do nothing to get out of it before its natural end.”

BIBLIOGRAPHY
Hayek, F. A. von. 1931. Prices and Production. G. Routledge & Sons, Ltd, London.

Hayek, F. A. von. 1934. “Capital and Industrial Fluctuations,” Econometrica 2.2: 152–167.

Hayek, F. A. von. 1935. Prices and Production (2nd edn). Routledge and Kegan Paul.

Mises, L. von. 2009 [1953]. The Theory of Money and Credit (enlarged, new edn). Ludwig von Mises Institute, Auburn, Ala.

Hayek’s Prices and Production (1935), Lecture I: A Summary

In what follows, I summarise Lecture I of Hayek’s Prices and Production (2nd edn.; 1935), the classic work where Hayek developed his version of the Austrian business cycle theory (ABCT). I use the second, revised edition of 1935 (the first edition was published in 1931).

Hayek notes that by the 1930s it was widely accepted that monetary influences can play a great role in the “volume and direction of production” (Hayek 1935: 1).

Hayek devotes much of Lecture I to a review of the history of monetary theory. The first major stage of monetary theory was the development of the quantity theory.

However, Hayek criticised the quantity theory for neglecting the way in which money supply changes can cause changes in relative prices (Hayek 1935: 3–6). Hayek concludes that money is not neutral in its effects (Hayek 1935: 7).

The “second stage” in the history of monetary theory was the realisation that the quantity theory is wrong to assume that money supply changes merely affect the general price level in a uniform and proportional manner (Hayek 1935: 8). Locke, Montanari and, above all, Richard Cantillon realised this (Hayek 1935: 8). Hayek sketches the mechanism we now call Cantillon effects (Hayek 1935: 9–10):

“… [sc. Cantillon] attempts to show ‘by what path and in what proportion the increase of money raises the price of things’. Starting from the assumption of the discovery of new gold or silver mines, he proceeds to show how this additional supply of the precious metals first increases the incomes of all persons connected with their production, how the increase of the expenditure of these persons next increases the prices of things which they buy in increased quantities, how the rise in the prices of these goods increases the incomes of the sellers of these goods, how they, in their turn, increase their expenditure, and so on. He concludes that only those persons are benefited by the increase of money whose incomes rise early, while to persons whose incomes rise later the increase of the quantity of money is harmful.” (Hayek 1935: 8–9).

The “third stage” in the development of monetary theory was when economists examined how money supply increases affect the rate of interest, and through this the demand for capital goods and consumer goods (Hayek 1935: 11–12).

Hayek traces these ideas through the 19th century British economists and writers, and lists the following:

(1) Henry Thornton’s An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802), p. 287.

(2) Lord King’s Thoughts on the Effects of the Bank Restriction (London, 1803), p. 20.

(3) John Leslie Foster’s An Essay on the Principles of Commercial Exchanges (London, 1804), p. 113.

(4) David Ricardo’s The High Price of Bullion: A Proof of the Depreciation of Bank Notes (2nd edn.; London, 1810), p. 47, and On the Principles of Political Economy and Taxation (3rd edn.; London, 1821), p. 349–350.

(5) the “Report of the Committee on Gold Bullion” (London, 1810), p. 56.

(6) Thomas Joplin’s Outlines of a System of Political Economy (London, 1823), pp. 37–38, and An Analysis and History of the Currency Question (London, 1832).

(7) Thomas Tooke’s An Inquiry into the Currency Principle (London, 1844), p. 77, and Considerations of the State of the Currency (London, 1826), p. 22.

(8) Nassau William Senior’s Biographical Sketches (London, 1863).

(9) John Stuart Mill’s Principles of Political Economy: With Some of their Applications to Social Philosophy (6th edn.; London, 1865).

These authors presented monetary theories that were precursors to Knut Wicksell’s monetary equilibrium theory, with a natural rate of interest set by the profits on real capital and a money rate of interest that can diverge from the natural rate.

The “fourth stage” of monetary theory seen by Hayek as the antecedent to the ABCT was that linking money supply and interest rate changes to the production of capital goods (Hayek 1935: 18). The authors cited by Hayek who developed the idea of “forced saving” in relation to capital goods investment are as follows:

(1) Jeremy Bentham’s Manual of Political Economy (written in 1804 but only published in 1843).

(2) Thomas Robert Malthus’ “Depreciation of Paper Currency,” Edinburgh Review 17.34 (1811): 339–372, at p. 363.

(3) John Stuart Mill’s “On Profits and Interest” and Principles of Political Economy (6th edn.; London, 1865).

Leon Walras probably rediscovered the “forced saving” doctrine in 1879, and from him it passed to Wicksell (Hayek 1935: 22).

But it was Wicksell who combined the different strands of monetary theory into one synthesis (Hayek 1935: 23).

Hayek then summarised Wicksell’s monetary equilibrium theory as follows:

“Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.

Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices; if they raise the money rate above the equilibrium rate—a case of less practical importance—they exert a depressing influence on prices. From this correct statement, however, which does not imply that the price level would remain unchanged if the money rate corresponds to the equilibrium rate, but only that, in such conditions, there are no monetary causes tending to produce a change in the price level, Wicksell jumps to the conclusion that, so long as the two rates agree, the price level must always remain steady. There will be more to say about this later. For the moment, it is worth observing a further development of the theory. The rise of the price level which is supposed to be the necessary effect of the money rate remaining below the equilibrium rate, is in the first instance brought about by the entrepreneurs spending on production the increased amount of money loaned by the banks. This process, as Malthus had already shown, involves what Wicksell now called enforced or compulsory saving. That is all I need to say here in explanation of the Wicksellian theory.” (Hayek 1935: 23–25).

Mises had already adopted Wicksell’s monetary theory and developed the first form of the ABCT (Hayek 1935: 25), and Hayek’s own version in Prices and Production was a development of Mises’.

Hayek departs from Wicksell’s monetary theory on a number of points:

(1) Hayek thinks that the banks need to keep the amount of money in circulation unchanged to secure a stable price level, and

(2) the amount of money in circulation has to be changed as the volume of production increases or decreases (Hayek 1935: 27).

But Hayek thinks that the banks cannot keep the demand for real capital in line with the supply of savings and the price level stable at the same time, except in a stationary equilibrium state (Hayek 1935: 27). In times of expansion of production, even when the money rate of interest is equal to the natural rate, there would be a falling price level (Hayek 1935: 27):

“The banks could either keep the demand for real capital within the limits set by the supply of savings, or keep the price level steady; but they cannot perform both functions at once. Save in a society in which there were no additions to the supply of savings, i.e., a stationary society, to keep the money rate of interest at the level of the equilibrium rate would mean that in times of expansion of production the price level would fall. To keep the general price level steady would mean, in similar circumstances, that the loan rate of interest would have to be lowered below the equilibrium rate. The consequences would be what they always are when the rate of investment exceeds the rate of saving.” (Hayek 1935: 27–28).

Hayek also repudiates the idea of a general price level as a useful economic concept (Hayek 1935: 29–30).

In place of the general value of money, Hayek substitutes the crucial concept of how money influences the relative values of goods (Hayek 1935: 31). If money leaves relative values of goods’ prices unchanged, then money is “neutral” (Hayek 1935: 31).

BIBLIOGRAPHY
Foster, John Leslie. 1804. An Essay on the Principles of Commercial Exchanges, and more particularly of the Exchange between Great Britain and Ireland: With an Inquiry into the Practical Effects of the Bank Restrictions. J. Hatchard, London.

Hayek, F. A. von. 1931. Prices and Production. G. Routledge & Sons, Ltd, London.

Hayek, F. A. von. 1935. Prices and Production (2nd edn). Routledge and Kegan Paul.

Joplin, Thomas. 1823. Outlines of a System of Political Economy: written with a View to Prove to Government and the Country, that the Cause of the Present Agricultural Distress is Entirely Artificial: and to suggest a Plan for the Management of the Currency. Baldwin, Cradock, and Joy, London.

Joplin, Thomas. 1832. An Analysis and History of the Currency Question: Together with an Account of the Origin and Growth of Joint Stock Banking in England: Comprised in a Brief Memoir of the Writer’s Connexion with these Subjects. James Ridgway, London.

Malthus, Thomas Robert. 1811. “Depreciation of Paper Currency,” Edinburgh Review 17.34: 339–372.

Mill, John Stuart. 1865. Principles of Political Economy: With Some of their Applications to Social Philosophy (6th edn.). Longmans Green, London.

Report from the Committee of Secrecy on the Bank of England Charter: With the Minutes of Evidence, Appendix and Index, J. & L. G. Hansard & sons, London, 1832.

Report, Together with Minutes of Evidence, and Accounts from the Select Committee on the High Price of Gold Bullion: Ordered, by the House of Commons, to be Printed, 8 June 1810 (Report of the Committee on Gold Bullion, 1810), J. Johnson and J. Ridgway, London, 1810.

Ricardo, David. 1810. The High Price of Bullion: A Proof of the Depreciation of Bank Notes (2nd edn.). John Murray, London.

Ricardo, David. 1821. On the Principles of Political Economy and Taxation (3rd edn.). John Murray, London.

Senior, Nassau William. 1863. Biographical Sketches. Longman, Green, Longman, Roberts, & Green, London.

Thornton, Henry. 1802. An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. J. Hatchard, London.

Tooke, Thomas. 1826. Considerations of the State of the Currency. John Murray, London.

Tooke, Thomas. 1844. An Inquiry into the Currency Principle: The Connection of the Currency with Prices, and the Expediency of a Separation of Issue from Banking. Longman, Brown, Green, and Longmans, London.

Hayek’s Original View of Fractional Reserve Banking

Hayek’s original view of fractional reserve banking can be found in Hayek’s essay Monetary Theory and the Trade Cycle (1929; English trans. 1933 by N. Kaldor and H.M. Croome; see Hayek 2008: 1–130):

“It follows particularly from the point of view of the monetary theory of the trade cycle that it is by no means justifiable to expect the total disappearance of cyclical fluctuations to accompany a stable price level—a belief Professor Lowe seems to regard as the necessary consequence of the monetary theory of the trade cycle. Professor Röpke is undoubtedly right when he emphasizes the fact that ‘even if a stable price level could be successfully imposed on the capitalist economy the causes making for cyclical fluctuations would not be removed.’ But to realize this, as the preceding argument shows, is by no means ‘equivalent to a rejection of a 100 percent monetary Trade Cycle theory.’ On the contrary, on this view, we must regard Professor Röpke’s theory, which coincides in the more important points with our own, as itself constituting such a 100 percent monetary trade cycle theory.

Once this is realized, we can also see how nonsensical it is to formulate the question of the causation of cyclical fluctuations in terms of “guilt,” and to single out, e.g., the banks as those ‘guilty’ of causing fluctuations in economic development. Nobody has ever asked them to pursue a policy other than that which, as we have seen, gives rise to cyclical fluctuations; and it is not within their power to do away with such fluctuations, seeing that the latter originate not from their policy but from the very nature of the modern organization of credit. So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulting trade cycles. They are, in a sense, the price we pay for a speed of development exceeding that which people would voluntarily make possible through their savings, and which therefore has to be extorted from them. And even if it is a mistake—as the recurrence of crises would demonstrate—to suppose that we can, in this way, overcome all obstacles standing in the way of progress, it is at least conceivable that the non-economic factors of progress, such as technical and commercial knowledge, are thereby benefited in a way we should be reluctant to forgo.” (Hayek 2008: 101–102).

Two points emerge, as follows:

(1) This passage appears to have been written before the first edition of Prices and Production (1931; 2nd edn. 1935), and is quite compatible with Hayek’s view of business cycles in those works. Fractional reserve banking is not fraudulent, nor are fiduciary media. Fractional reserve banking is a product of free market exchange. Thus, even if we were to accept the Austrian business cycle theory, cycles would be an endogenous outcome of market processes where voluntary fractional reserve banking exists.

Robert Skidelsky has a relevant insight into the reception of Hayek’s Austrian trade cycle theory in the 1930s:

“Hayek, like Keynes, hoped to prevent a slump from developing by preventing the credit cycle from starting. But his method was very different. It was to forbid the banks to create credit, something which could be best achieved by adherence to a full gold standard. He was quite pessimistic, though, about this being practical politics, so his conclusion, like Keynes’s, was that a credit-money capitalist system is violently unstable – only with this difference, that nothing could be done about it. One can understand why Hayek’s doctrines attracted a certain kind of socialist: they seemed to reach Marx’s conclusions by a different route. Because of the Austrian school’s close attention to the institutional and political setting of a credit-money economy, Hayek’s picture of the capitalist system in action was altogether more sombre than that of conventional Anglo-Saxon economics, with its story of easy adjustments to ‘shocks.’” (Skidelsky 1992: 457).

The Austrian trade cycle theory requires that real world capitalism has been severely flawed for over two centuries, and serious entertainment of the theory also leads to the conclusion that the history of modern capitalism has been nothing but an endless series of unsustainable cycles.

(2) But even this passage shows Hayek’s flawed thinking: capitalist economies have many periods where resources are idle and international trade allows the importing of scarce resources. Under such circumstances, fractional reserve banking is a highly efficient way of inducing investment by creating credit. Furthermore, the unique Wicksellian natural rate of interest – which underlies Hayek’s theory – is a non-existent, non-operational concept outside of equilibrium. Nor is the time preference theory of interest used by Austrians in their expositions of the Austrian business cycle theory sound.

Hayek’s assumption that fractional reserve banking results in extortion of real resources from savers is not true when the economy has significant idle resources and unused capacity. And even when relative scarcity for some commodities exists, economies can obtain goods by international trade.

BIBLIOGRAPHY

Block, W. and Garschina, K. M. 1996. “Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process,” The Review of Austrian Economics 9.1: 77–94.

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

Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.

Hayek, F. A. von, 1935. Prices and Production (2nd edn.), Routledge and Kegan Paul.

Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour, 1920–1937 (vol. 2), Macmillan, London.

Hülsmann on Mises’s Business Cycle Theory

Ludwig von Mises was the founder of the Austrian business cycle theory (ABCT). The theory was originally called the “circulation-credit” theory of the business cycle. Mises’s various versions of his business cycle theory can be found in these works:

(1) The version of Mises in The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366. The first version presumably appeared in the original German edition, the Theorie des Geldes und der Umlaufsmittel (The Theory of Money and Credit; Munich and Leipzig, 1912) and the 2nd German edition published in 1924. An English translation appeared in 1934.

(2) Mises’s version in Monetary Stabilization and Cyclical Policy (1928) that can be found in Mises 2006 [1978], p. 99ff.

(3) The version in Mises’s Nationalökonomie, Theorie des Handelns und Wirtschaftens (Geneva, 1940).

(4) The version in Human Action: A Treatise on Economics (Auburn, Ala., 1998 [1949]), pp. 568–583.

Hülsmann has a pertinent discussion of the flaws in the original theory of Mises in The Theory of Money and Credit:

“In light of his theory of interest, Mises now clarified the relationship between interest and changes in the quantity of money. The Austrian (Misesian) theory of the business cycle asserts that intertemporal misallocations result from inflation-induced reductions of the interest rate. But what was the precise meaning of ‘reduction’? Mises did not mean to assert that simple changes of the interest rate would induce a business cycle. The fact that today’s interest is lower than yesterday’s does not by itself mean that a misallocation has occurred.

In his Theory of Money and Credit, Mises had based his analysis on the Wicksellian distinction between the natural rate of interest and the money rate. But this distinction was untenable in light of Mises’s work on economic calculation and on the non-neutrality of money. There is no such thing as a natural rate of interest, defined as the rate of interest that would prevail in a barter economy. And even if there were such a ‘natural’ rate of interest, it would still be irrelevant for the analysis of a monetary economy. Money is not just a veil over a barter economy.

It affects all economic relations. Prices, incomes, allocation, and social positions in an economy using money are completely different from what they would be in a society with no common medium of exchange. And so the interest rate in a monetary economy is necessarily different from what it would have been in the same economy if the market participants had decided to forgo the benefits of money. Even if one could hypothetically compare ‘natural’ and money interest rates—which is not the case—it would not follow that intertemporal misallocations would ensue whenever the ‘natural’ rate was higher than the money rate.

In Nationalökonomie, Mises gave a new exposition of his business cycle theory. He came up with a new benchmark to identify pernicious reductions of the monetary interest rate. The relevant benchmark was no longer the Wicksellian natural rate that would exist if the economy were a barter economy. It was rather the monetary interest rate that would exist in the absence of credit expansion. Any increase in the supply of credit on the market will reduce the interest rate, but if the increase comes from printing paper money or banknotes (rather than from savings) then the artificially lower interest rate falsifies the entrepreneurial profit calculus. In light of the decreased interest rate, a greater number of business projects appear to be profitable and are launched. But the material factors of production necessary for the physical completion of the greater number of projects do not exist.

Credit expansion does not mean expansion of the real factor endowment of the economy; it merely means expansion of the money supply through the credit market. It follows that it is physically impossible to sustain the new structure of production that resulted from the credit expansion. The boom must eventually end in a bust.” (Hülsmann 2007: 779–781).

Hülsmann is entirely correct about the non-existence of Wicksell’s natural rate of interest. Mises’s exposition of the ABCT in The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]) and Monetary Stabilization and Cyclical Policy (1928) both use the Wicksellian unique natural rate of interest concept. It follows that both these expositions are severely flawed.

But Mises’s new version of his business cycle theory in Nationalökonomie (and developed in Human Action) still has major flaws, as follows:

(1) it assumes an economy with no idle resources and no international trade. In reality, capitalist systems have historically had many periods where there are significant idle resources, like labour, raw materials, capital goods and other factor inputs. If an economy with significant idle resources has investment via fractional reserve banking or central bank creation of excess reserves, how will the inflationary pressures imagined by ABCT happen if productive resources simply do not need to be freed in the stages close to consumption? Such factor inputs will be available or quickly made available through increasing capacity utilization in the relevant industries, or even imported from overseas. Versions of ABCT dispensing with a Wicksellian natural rate of interest fail to explain why the cycle effects would happen if factor inputs were not scarce and available through international trade. And even when resources become scarce the theory still has problems.

(2) Like all versions of ABCT, it assumes that credit flows primarily or exclusively to producers engaged in capital goods investments. It is obvious that this is a grossly simplistic and unrealistic assumption in the modern world. Credit today is a complex composite of flows to create consumer loans, loans to speculators on assets or primary commodities, and loans for capital goods investments. When booms in business cycles are primarily driven by credit flows to speculators who blow asset bubbles, the dynamics of the boom are different from those of booms in (allegedly) unsustainable high-order capital goods investments, as assumed by ABCT.
As a concrete example, in the 2000s the economic effect of 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 and debt deflation.

(3) Underlying Mises’s new theory is still the mistaken time preference theory of interest rates.

(4) As Robert Vienneau has argued, there is no necessary reason why lower interest rates would cause production to be re-oriented to higher-order capital goods anyway, and even classifying capital structure into well-defined higher orders is dubious in itself (see Vienneau 2006 and 2010).

(5) The development of any boom in the business cycle is dependent on a myriad of factors, and whatever future profit any particular capital goods project will deliver can only be a matter of subjective expectation in the present. A rise in interest rates may decrease the demand for credit and raise the burden of servicing debt, but, if there is a mutual expectation that a particular investment might deliver future profit by the bank and business, it is normal for businesses to refinance their investment loans or have the loans rolled over by banks.

(6) In the real world, even when inflationary booms occur, the causes of recession and depression are often very different from the ridiculously simple Austrian business cycle theory. The business cycle after WWII down to the 1980s was rather different from the pre-1933 business cycle. The post-war world saw downturns that were mostly “inventory recessions.” Recessions from the 19th-century to the 1930s often (though not always) conformed to a pattern of bursting asset bubbles, financial crises, bank runs and debt deflation. The Austrian trade cycle theory says nothing about asset bubbles in financial markets or real assets like housing. In the 1990s and 2000s, many nations have experienced asset bubbles and the debt deflation-type of recession once again (or balance sheet recession), after neoliberal economics introduced lax and ineffective forms of financial regulation.

BIBLIOGRAPHY

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel, Duncker & Humblot, Munich and Leipzig.

Mises, L. von. 1924. Theorie des Geldes und der Umlaufsmittel (2nd edn), Duncker & Humblot, Munich.

Mises, L. von. 1934. The Theory of Money and Credit (trans. H. E. Batson from 2nd German edition of 1924), J. Cape, London.

Mises, L. 1940. Nationalökonomie, Theorie des Handelns und Wirtschaftens, Éditions Union, Geneva.

Mises, L. von. 1953. The Theory of Money and Credit (enlarged, new edn), Yale University Press, New Haven.

Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Mises Institute, Auburn, Ala.

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.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.

Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886

Economic Calculation Yet Again

Jonathan Finegold Catalán responds here to my previous post:

Jonathan Finegold Catalán, “Economic Miscalculation,” Economic Thought, 6 February, 2012.

While I did enjoy the post and mostly appreciated the points made, nevertheless I don’t think it was quite fair.

Some points follow:

(1) Catalán makes the following comment:

“While the theory of intertemporal discoordination is one facet of the theory of economic coordination (or, more accurately, a theory of what occurs when prices are distorted and there is serious and prolonged discoordination), it is a minor one (although, one of the best elucidated to-date). How Austrian business cycle theory fits into the framework of coordination can be best picked up from a reading of lecture two and lecture three of Friedrich Hayek’s Prices and Production, which explains the intertemporal coordination of producers’ goods in conditions of equilibrium. The real substance of coordination theory in the Austrian exposition of the business cycle is not in the explanation of how resources are misallocated, but rather in how resources are allocated without interference or distortion.”

It seems rather strange to assert that the Austrian theory of intertemporal discoordination (the Austrian trade cycle theory or ABCT) is only a minor “facet of the [sc. Austrian] theory of economic coordination.” Most Western economies today are ones where the vast majority of all production is done privately and the majority of capital goods are owed privately, so the ABCT must be the major Austrian theory that applies to them.

Catalán states that the “real substance of coordination theory in the Austrian exposition of the business cycle is not in the explanation of how resources are misallocated, but rather in how resources are allocated without interference or distortion.” Since Hayek’s theory depends on a natural rate of interest conceived as an equilibrium rate, and his theory begins with a stationary equilibrium state, the Hayekian versions of ABCT are not even quintessentially “Austrian” at all, given that, historically, Austrian economics rejects Walrasian equilibrium analysis.

The only state where “resources are allocated without interference or distortion” in the Hayekian theory is an equilibrium state – a completely fictitious, imaginary state of no relevance to the real world in which we live. Hayek’s Austrian business cycle theory (ABCT) was the product of his neoclassical phase, and he himself stated that he originally held that his “theory of the trade cycle ... ought to be organically superimposed upon the existing theory of equilibrium” (Hayek 1975 [1939]: 137). Does Catalán think that Austrian economics is just another boring and useless equilibrium theory? (the answer, I presume: of course he doesn’t).

Now the anarcho-capitalists would no doubt demand that no government must exist at all to achieve “resources ... allocated without interference or distortion,” but that was not the view of Hayek or Mises, both of whom had a role for government. For both Mises and Hayek there was presumably a type of limited government that can exist without causing economic calculation problems.

(2) Catalán states:

“Do only socialist economics lack economic coordination? This is the claim that LK essentially makes when he balks at Austrians who accuse him of not understanding “economic calculation.”

I am afraid that Catalán appears to have missed my point.

I am well aware that Austrians charge that market economies with government intervention or even with fractional reserve banking expanding fiduciary media are subject to alleged economic calculation problems. I understand the alleged economic calculation problems as described in ABCT perfectly well. The absurd charge made by internet Austrians is that I don’t even understand this (i.e., presumably I never heard of it, have never read the various versions of ABCT, or don’t even know the alleged processes causing the distortions, and so on). This is the most tiresome nonsense.

In the theory of Hayek and Mises, it was, above all, the private fractional reserve banks expanding fiduciary media that cause the cycle: so one major cause of the alleged “economic calculation problems” was in fact the endogenous capitalist banking system.

(3) Another point made by Catalán:

“For instance, an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation, whereas a Keynesian (at least one loyal to Keynes’ business cycle theory) will tell you that it does.”

Which type of Austrian is Catalán referring to?

Ludwig Lachmann and other Austrians influenced by him would agree with Post Keynesians that there is no tendency to general equilibrium in a market economy.

Real world market economies lack the type of highly efficient coordination alleged by Classical and neoclassical economists. Uncertainty means it is extremely unlikely that production decisions will mesh with consumers’ purchasing patterns perfectly. Subjective expectations make investment liable to fluctuate.

Post Keynesianism would add: Say’s law is a myth. Saving of money without its use for investment and secondary financial asset markets diverting money from current income streams can cause a shortfall in aggregate demand. Private debt, asset bubbles and the dynamics of debt deflation can wreck havoc on market economies.

(4) Catalán charges that:

“Economists like LK need to understand, though, where exactly Austrians stand on the debate with regards to [sc. how the private economy works] ... So far, he has shown that he does not.”

In fact, I understand well that Austrians themselves disagree on the tendency for market coordination to occur, and even, to some extent, how the private economy works (e.g., the dispute between anti-fractional reserve banking Austrians and free bankers). Catalán’s charge is simply false (I would also add that I have never made any claims to being an actual economist, and I’m not).

BIBLIOGRAPHY

Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.

My Posts on the Austrian Business Cycle Theory (ABCT)

I provide below a list of my various post criticising the Austrian Business Cycle Theory (ABCT):

“Austrian Business Cycle Theory: Its Failure to explain the Crisis of 2008,” October 18, 2010.

“Kirzner on Austrian Business Cycle Theory,” May 30, 2011.

“ABCT and Idle Resources,” June 6, 2011.

“Austrian Business Cycle Theory: Epicycles on Epicycles,” June 6, 2011.

“The Natural Rate of Interest: A Wicksellian Fable,” June 6, 2011.

“Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest,” June 18, 2011.

“Mises’s “Evenly Rotating Economy” (ERE) and ABCT,” June 20, 2011.

“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.

“Mises’s “Originary Interest Rate” Theory,” June 21, 2011.

“The Differences Between Mises and Hayek on ABCT,” June 23, 2011.

“Hayek and the Myth of Neutral Money,” June 23, 2011.

“Milton Friedman on ABCT,” June 24, 2011.

“There was no US Recovery in 1921 under Austrian Trade Cycle Theory!,” June 25, 2011.

“Vaughn on Mises’s Trade Cycle Theory,” June 29, 2011.

“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.

“Mises’s Versions of ABCT,” July 1, 2011.

“ABCT and Full Employment,” July 1, 2011.

“Hayek’s Trade Cycle Theory and its Appeal to Socialists,” July 1, 2011.

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Bibliography on the Sraffa-Hayek Debate,” July 20, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Lachmann on Trade Cycle Models,” August 27, 2011.

“David Glasner on Hayek versus Sraffa,” September 10, 2011.

“Hayek and the Concept of Equilibrium,” September 20, 2011.

“Hayek and Equilibrium as a Starting Point for an Austrian Trade Cycle,” September 21, 2011.

“ABCT without a Unique Natural Rate of Interest?,” September 22, 2011.

“Did Hayek Advocate Public Works in a Depression?,” September 25, 2011.

“ABCT and the Flow of Credit,” October 6, 2011.

“Michael Emmett Brady on Hayek’s Concept of Uncertainty,” October 11, 2011.

I have added an updated list here of the Austrian books and articles where ABCT is given in its various versions:

(1) The version of Mises in The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366. (It is unclear to me if this appears in the original German edition, Theorie des Geldes und der Umlaufsmittel [Munich and Leipzig, 1912] or the 2nd German edition published in 1924.)

(2) Mises’s version in Monetary Stabilization and Cyclical Policy (1928) in Mises 2006 [1978], The Causes of the Economic Crisis and Other Essays Before and After the Great Depression (Ludwig von Mises Institute, Auburn, Ala.), p. 99ff.

(3) Hayek’s essay Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome] in Hayek 2008: 1–130).

(4) Hayek’s paper on intertemporal equilibrium:

F. A. Hayek, 1984 [1928]. “Intertemporal Price Equilibrium and Movement in the Value of Money,” in R. McCloughry (ed.), Money, Capital and Fluctuations. Early Essays, Routledge & Kegan Paul, London.

(5) Hayek’s first version of ABCT from his LSE lectures in Prices and Production (London, 1931).

(6) Hayek’s 2nd edition of Prices and Production in 1935.

(7) Hayek’s second version of ABCT in Profits, Interest and Investment (London, 1939).

(8) Hayek’s discussion in The Pure Theory of Capital (London, 1941).

(9) The version of Mises in Human Action: A Treatise on Economics (Auburn, Ala., 1998), pp. 568–583.

(10) Rothbard’s development of ABCT in Man, Economy, and State: A Treatise on Economic Principles (Ludwig von Mises Institute, Auburn, Ala., 2004 [1962]), pp. 994–1008; and in Economic Depressions: Their Cause and Cure (Ludwig von Mises Institute, Auburn, Ala. 2009 [1969]).

(11) M. Skousen’s interpretation in The Structure of Production (New York, 1990).

(12) Roger Garrison in Gerald P. O’Driscoll and Mario J. Rizzo’s The Economics of Time and Ignorance (2nd edn; Routledge, Oxford, UK., 1996), pp. 198–213.

(13) Roger Garrison’s Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000). A summary can be found in Garrison (1997).

(14) the exposition in Jesus Huerta de Soto, Money, Bank Credit and Economic Cycles (trans. M. A. Stroup; Ludwig von Mises Institute, Auburn, Ala, 2006), pp. 265–508.

BIBLIOGRAPHY

Garrison, R. W. 1997. “Austrian Theory of Business Cycles,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 23–27