Debunking Austrian Economics 101

I have assembled below a set of links to various posts on my blog for debunking the theories of Austrian economics.

Please note that not all the posts actually debunk Austrian theories, as some are merely descriptive, and allow the reader to understand what the Austrians believe. Some examine the history of the school. A few posts are even constructive in that Post Keynesians and some Austrians can agree on certain points (such as the posts on Ludwig Lachmann).

One important point I have always stressed is that the Austrian school itself is heterogeneous.

In my view, a useful division of modern Austrians would be as follows:

(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety often supports praxeology and utilitarianism;

(3) Hayek’s economics, with a minimal state, and with an empirical (or Popperian) approach to economic method, in place of praxeology;

(4) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(5) Radical subjectivists like Ludwig M. Lachmann (1906-1990), and Austrians influenced by him.

Some of the first generation Austrians were actually progressive liberals and sympathetic to Fabian socialism. Hayek came to support public works and fiscal policy in a depression. Ludwig Lachmann accepted government intervention for economic stability in depressions, and rejected even the idea that free markets tend to general equilibrium.

(1) The History, Classification, and Subgroups of Austrian Economics
“Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists,” October 21, 2010.

“The Different Types of Austrian Economics,” December 5, 2010.

“The Types of Pro-Free Market Libertarians,” January 30, 2011.

“A Classification of Libertarianism,” December 20, 2011.

“An Overview of the Major Schools of Economics,” January 31, 2011.

“Bibliography on Austrian Economics,” May 26, 2011.

“Some Quick Thoughts on Austrian Economics,” May 30, 2011.

“Questions for Austrians Before You Debate Them,” June 2, 2011.

“Why are there no Austrian Socialists?,” June 3, 2011.

“The Neoclassical Wing of the Austrian School,” June 5, 2011.

“The “Dreaded” Post Keynesians?,” August 29, 2011.

“Roger Koppl on Modern Austrian Economics,” December 10, 2011.

“Butos and Koppl on Varieties of Subjectivism: Keynes and Hayek,” December 30, 2011.

(2) Debunking Misesian Praxeology
“Mises’ Praxeology: A Critique,” October 1, 2010.

“Limits of the Human Action Axiom,” February 28, 2011.

“Hayek on Mises’ Apriorism,” May 23, 2011.

“Mises and Logic,” August 26, 2011.

“My Post on Praxeology gets some Attention,” March 7, 2012.

(3) Ludwig Lachmann and Radical Subjectivism
The only sensible wing of the Austrian school (comparatively speaking).
“Ludwig Lachmann on Government Intervention,” July 9, 2011.

“A Startling Admission from Ludwig Lachmann,” July 11, 2011.

“Austrians on Public Works and Fiscal Stimulus,” November 20, 2011.

“Audio Lecture by Ludwig M. Lachmann,” December 21, 2011.

“Ludwig Lachmann: Bibliography and Resources,” December 31, 2011.

“Lachmann Endorsed Keynesian Stimulus in a Depression,” February 8, 2012.

(4) Against the Pure Time Preference Theory of Interest Rates
“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.
Robert P. Murphy, an actual Austrian, debunks the pure time preference theory of interest.

(5) Against Say’s Law
“The Myth of Say’s Law,” October 7, 2010.

“Say’s Law Presupposes Aggregate Demand as a Meaningful Concept,” May 28, 2011.

“Say Repudiated Say’s Law,” December 1, 2011.

“Jean Baptiste Say on Failures of Aggregate Demand,” December 1, 2011.

(6) Austrians and the Concept of Uncertainty
“A Note on Mises and the Concept of Uncertainty,” August 1, 2011.

(7) Against the Austrian Theory of Money
“The Quantity Theory of Money: A Critique,” July 18, 2010.
While not, strictly speaking, an Austrian theory, many internet or vulgar Austrians repeat fables about the quantity theory of money.

“Austrian Measures of the Money Supply,” March 5, 2011.

“Keynes on the Special Properties of Money,” May 8, 2011.

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

“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“Gold as Commodity Money and its Elasticity of Production,” November 18, 2011.

“Rothbard on the Bill of Exchange,” December 11, 2011.

“Money as Debt,” December 26, 2011.

“Menger on the Origin of Money,” January 5, 2012.

“The Origins of Money,” January 8, 2012.

“Mises on the Origin of Money,” January 12, 2012.

“David Graeber on the Origins of Money,” January 23, 2012.

“David Graeber versus Robert Murphy: A Review,” January 24, 2012.

“Quiggin on the Origin of Money,” February 10, 2012.

“Money as a Unit of Account and its Origins,” February 11, 2012.

“Observations on Non-Commercial Money,” February 18, 2012.

“Hayek Grasps Endogenous Money,” March 16, 2012.

“‘Funny Money’: A Loaded Phrase,” May 12, 2012.

“More on Goldsmiths’ Notes and the Act of 1704,” May 13, 2012.

(8) Against Mises’s Regression Theorem
“Mises’s Regression Theorem: A Critique,” January 13, 2012.

(9) Against the Austrian View of Deflation
Some Austrians think deflation is desirable; others do not. Hayek most notably changed his mind and condemned “secondary deflation.” The Austrians hold inconsistent views on deflation.

“Hayek on Secondary Deflation,” January 24, 2011

“Rothbard Refutes Rothbard on the Effects of Deflation,” January 28, 2011.

(10) Against the Austrian Theory of Inflation
“The Austrian Theory of Inflation: Myths and Reality,” April 15, 2010.

“Are Cantillon Effects an Argument Against Government Spending? ,” September 27, 2011.

“Two Austrian Definitions of Inflation,” November 22, 2011.

(11) Austrian Substitutes for GDP are just Aggregates too
“Austrian Substitutes for GDP – They are Aggregates!,” January 22, 2012

“Epic Fail from William L. Anderson,” March 8, 2012.

(12) Against Vulgar Austrians
Many internet Austrians are so ignorant they do not even understand fundamental Austrian concepts.

“Full Employment Equilibrium is Not an Austrian Concept,” April 27, 2011.

“Prediction, Empiricism and Austrian Economics,” August 31, 2011.

“Austrian Nonsense About Economic Calculation,” February 3, 2012.

“Economic Calculation Yet Again,” February 7, 2012.

“Economic Calculation, Part 3,” February 7, 2012.

“Some Discussion of Aggregates in the Blogosphere,” March 26, 2012.

“Austrians Can’t Get their Story Straight on the Effects of Austerity,” May 25, 2012.

(13) Hayek’s Bigotry Exposed
“Hayek the Ethnic Bigot and the Perils of the Ad Hominem Fallacy,” January 14, 2012.

(14) Hayek’s Interventionism
“Hayek on Monetary Stabilisation in a Secondary Deflation,” August 6, 2011.

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

“When Did Hayek Renounce Liquidationism?,” January 1, 2012.

“Hayek the Evil Socialist,” January 1, 2012.

(15) Austrian Myths on Government Debt
“Robert Murphy versus Paul Krugman on Government Debt,” January 29, 2012.

(16) Questionable or Failed Austrian Predictions
“It’s 2011 and Still No Hyperinflation,” January 11, 2011.

“Mises Did Not Predict the US Stock Crash of 1929,” May 30, 2011.

“Keynes on the End of the Gold Exchange Standard,” June 21, 2011.

“Another Failed Prediction by Mises,” December 2, 2011.

“Austrians Predicted the Housing Bubble? – But so did Post Keynesians and Marxists,” December 14, 2011.

“Hayek and the Stock Market Crash of 1929: So Much for His Predictive Powers,” December 28, 2011.

“Lionel Robbins and the Myth of Hayek’s Prediction of the Great Depression,” February 5, 2012.

(17) Against Free Trade / Law of Ricardian Association
“The Early British Industrial Revolution and Infant Industry Protectionism: The Case of Cotton Textiles,” June 22, 2010.

“Mises on the Ricardian Law of Association: The Flaws of Praxeology,” January 25, 2011.

(18) Against Austrian Interpretations of the Great Depression
“Smoot Hawley and the US Contraction of 1929–1933,” February 26, 2011.

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.

“Roosevelt’s Record on Unemployment: The Myth and Reality,” June 10, 2011.

“Debunking Catalán on the Recession of 1937–1938,” August 16, 2011.

“What Hoover Should have Done in 1931,” January 26, 2012.

“Steven Horwitz on Herbert Hoover: Mostly Misleading,” February 20, 2012.

(19) Austrian Myths about the 19th century Gold Standard Era
“US Unemployment in the 1890s,” January 24, 2012.

“US Unemployment, 1869–1899,” January 26, 2012.

(20) Austrians Misrepresent the Post-1945 Boom in America
“Keynesianism in America in the 1940s and 1950s,” January 22, 2011.

“The Post-1945 Boom in America,” July 15, 2011.

“Thomas E. Woods on Keynesian Predictions vs. American History: A Critique,” May 29, 2012.

“What Did Paul Samuelson really say about the Post-WWII US Economy?,” May 31, 2012.

(21) Against Rothbard
“Rothbard on Monopoly Price on the Unhampered Market,” July 24, 2011.

“Rothbard on Torture,” October 3, 2011.

(22) Against Ron Paul
“Ron Paul versus Paul Krugman,” May 1, 2012.

(23) Austrian Myths about Ancient Rome
“Inflation and the Fall of the Roman Empire,” June 12, 2011.

“Debt Deflationary Crisis in the Late Roman Republic,” June 16, 2011.

(24) Austrian Misrepresentations of Keynesianism
“William L. Anderson Flunks Keynesian Economics 101,” May 25, 2011.

“The Concept of “Animal Spirits” is a Red Herring,” June 27, 2011.

“Austrians have No Sense of Humour,” August 24, 2011.

“Keynes and Pyramid-Building: What He Really Meant,” August 25, 2011.

“Turning Stone into Bread?,” December 2, 2011.

“Keynes on Mises’s Theory of Money and Credit,” March 11, 2012.

“Fascism and Keynesianism?,” May 22, 2012.

“Robert P. Murphy Gets it Wrong on Stimulus in Sweden and the US,” May 22, 2012.

(25) Austrians and Equilibrium Theory
“Mises’s Three Concepts of Equilibrium,” June 23, 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.

“Equilibrium Amongst the Austrians,” January 28, 2012.

(26) Debunking Austrian Ethical Theories
There are at least two positions taken by Austrians on ethics: (1) some (like Mises) support a kind of utilitarianism/consequentialism, and (2) others support natural rights (Rothbard) or argumentation ethics (Hoppe).

“Economics and Ethics: A Brief Survey,” October 8, 2010.

“Ethical Theories: A Classification,” June 9, 2011.

“Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention,” October 7, 2010.

“Rothbard on Mises’ Utilitarianism: Why the Systems of Mises and Rothbard both Collapse,” October 8, 2010.

“Would Anarcho-Capitalists Allow the Earth to be Destroyed?,” February 28, 2011.

“Coercion and the ‘Taxation is Theft’ Argument,” May 25, 2011.

“More on ‘Taxation is Theft’,” May 26, 2011.

“Rothbard’s Argument for Natural Rights: A Critique,” August 15, 2011.

“Mises on Utilitarianism,” September 2, 2011.

“A Note on the Libertarian Asteroid Dilemma,” September 15, 2011.

“Hoppe on Argumentation Ethics,” October 23, 2011.

“Libertarianism and Christianity: A Contradiction in Terms?,” November 22, 2011.

“Government is Not Inherently Evil,” January 1, 2012.

(27) Mises and Fascism
“Mises on Fascism in 1927: An Embarrassment,” October 27, 2010.

“Mises the Hypocrite: When Reality Trumps Praxeology,” March 8, 2011.

“Keynes’s Remarks in the German Edition of the General Theory,” June 7, 2011.

(28) Keynes and Hayek
“Hayek and Keynes: Not So Far Apart?,” April 19, 2011.

“Who Cares if Hayek Won the Nobel Prize in Economics?,” April 26, 2011.

“Hayek vs. Keynes Round 2: Amusing Rubbish,” May 4, 2011.

“Bruce Caldwell on Hayek versus Keynes,” June 28, 2011.

“The Personal Relationship of Hayek and Keynes,” July 1, 2011.

“Skidelsky versus Selgin on Keynes and Hayek,” August 4, 2011.

“Skidelsky versus Selgin: The Full Version,” August 13, 2011.

“Another Keynes versus Hayek Debate,” November 14, 2011.

“Nicholas Wapshott Lecture on Keynes versus Hayek,” November 19, 2011.

“Krugman, Hayek versus Keynes and the Austrians,” December 9, 2011.

(29) Debunking the Austrians on the Recession of 1920–1921
“The US Recession of 1920–1921: Some Austrian Myths,” October 23, 2010.

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

“The Depression of 1920–1921: An Austrian Myth,” December 9, 2011.

“A Video on the US Recession of 1920-1921: Debunking the Libertarian Narrative,” February 5, 2012.

(30) Fractional Reserve Banking is not Fraud (against the Rothbardians)
“Hayek’s Original View of Fractional Reserve Banking,” February 29, 2012.

“Fractional Reserve Banking, Option Clauses, and Government,” January 31, 2012.

“Are the Public Ignorant of the Nature of Fractional Reserve Banking?,” December 17, 2011.

“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.

“Callable Option Loans and Fractional Reserve Accounts,” December 16, 2011.

“Future Goods and Fractional Reserve Banking,” December 15, 2011.

“Rothbard on the Bill of Exchange,” December 11, 2011.

“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.

“The Monetary Production Economy and Fiduciary Media,” December 11, 2011

“Fractional Reserve Banking: An Evil?,” June 26, 2010.

“The Romans and Fractional Reserve Banking,” February 23, 2011.

“Gene Callahan on Fractional Reserve Banking,” February 18, 2011.

“Lawrence H. White refutes Huerta de Soto on Fractional Reserve Banking,” February 22, 2011.

“Selgin on Fractional Reserve Banking,” June 1, 2011.

“Schumpeter on Fractional Reserve Banking,” June 12, 2011.

“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.

“More Historical Evidence on the Mutuum Contract,” October 1, 2011.

“What British Law Says about the Mutuum Contract,” October 2, 2011.

“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.

(31) Against the Austrian Business 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.

“Austrians Predicted the Housing Bubble? – But so did Post Keynesians and Marxists,” December 14, 2011.

“Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT,” December 27, 2011.

“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012

“Equilibrium Amongst the Austrians,” January 28, 2012.

“Hülsmann on Mises’s Business Cycle Theory,” February 11, 2012.

“Bloggers Debate the Austrian Business Cycle Theory,” February 12, 2012.

“Jonathan Finegold Catalán on Free Banking and ABCT,” May 14, 2012.

“Why Isn’t the Boom of 1946-1948 a Problem for Austrians?,” June 2, 2012.

Why Isn’t the Boom of 1946-1948 a Problem for Austrians?

The Austrians charge that the US boom of 1946 to 1948 is a problem for Keynesian economics; it is, of course, no such thing, as I have shown here and here.

But a commentator on Robert Murphy’s blog called “Lwaaks” made an insightful remark on why the boom might be a problem for Austrians, by quoting one David Ramsay Steele, which I reproduce here:

“Here is the full context. His comment appeared on the Libertarian Alliance discussion group (Yahoo Groups):

[David Ramsay Steele]: I haven’t given much attention to these issues for the past 20 years, no doubt mainly because I am no longer in frequent contact with anyone who wants to argue for the Austrian position.

As to ‘rating the Austrians,’ some Austrians had good things to say: Boehm-Bawerk’s criticism of Marx, and so forth. There are really two kinds of Austrians today: Misesians and people like Hayek who reject Misesian apriorism. I have a brief section on Misesian apriorism in FMTM [From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation, 1992] explaining why it won’t work and Hayek, for instance, would agree completely with what I say there.

As to the trade cycle, I long ago rejected the Austrian theory in both its Misesian and Hayekian forms. In 1977-1980 I was greatly preoccupied with this, and talked a lot with people like Jeff Hummel, who had been reared, so to speak, on the Misesian theory (as a typical born-again Rothbardian of that day) and was questioning it.

I actually had more or less rejected the theory before I read ‘The Hayek Story’. Rantala read ‘The Hayek Story’, discussed it with LSE faculty, came to agree with it, and convinced me it was correct.

The distinctive thing about Austrian trade cycle theory is its view of ‘real’ factors in the onset of the slump. Of course, much of what Mises and Hayek say overlaps with the ‘purely monetary’ theories of people like Milton Friedman, and long before that, of people like Hawtrey. So there is no dispute that inflation of credit may create a phoney boom, followed by an uncomfortable period of adjustment. What is distinctive about the Austrian theory is that it says the specific physical form of the capital which is malinvested plays a crucial role in the onset of the slump. So, for example, if lengthening the production structure requires a particular type of big, expensive machine that has no use with a shorter production structure, then that machine will have to be written off as a loss, since it is not suitable to the ‘return to reality’ when the boom is over.

What struck me very early about this (I think it crossed my mind when I read Rothbard’s book on the 1930s depression, around 1971) was that it’s an empirical claim, and at a quick glance, such physical incongruities don’t seem to loom all that large. So, if the production structure lengthens, you change the shape of investment into something more appropriate to a lower time-preference. Fair enough. But what does this really mean? Let’s say you have a factory. You start to use different types of machine tools, let’s say. Still, most of your factors will be just the same, or almost the same, as before: electricity, computers (or in the old days, office stationery), unskilled workers, workers with various types of skill such as accountants, engineers, salespeople, and managers, your factory building itself, your use of trucks to get materials into the factory and products out, and so on. In other words, the overwhelming majority of the factors you employ are not specific to higher or lower orders of production. It’s true that their application to specific tasks will shift a bit, but this goes on all the time, and is an inexact science at best.

Since the claim that physical incongruities are crucial is an empirical claim, I was then struck by the experience of the US at the end of World War II. If ever there was a case of an abrupt, almost overnight, mismatch between prior allocations of capital and today’s applications, we could hardly imagine a more spectacular example. Millions of people left the army and found civilian work. Hundreds of thousands of factories which had been producing military goods had to transform their operations into civilian production. Why was the whole system not seized by a violent slump?

To the purely monetary approach, this is simple and obvious. There was no violent contraction of the money supply, so there was no slump. But to the Austrians, what explanation could there possibly be? Their claim is that once the boom has got going it cannot be ended without a slump, and that this is so because of the need to suddenly re-allocate physical assets to completely new uses. But that re-allocation was obviously thousands of times greater in 1945 than it could ever be as the result of a few years of bank credit expansion, and yet there was no slump! The whole system adapted to the utterly changed conditions with amazing ease and smoothness.

This was what I thought before 1980, and I still think it today.

‘The Hayek Story’ was a revelation because it raised a different issue. Consumers are continually asserting their time preference by their buying every day. So there is no ‘lag’. Credit expansion cannot really change the allocation of capital in the higher order direction required by the Austrian theory, because consumers keep going into the stores and buying just as many groceries as they were before.

I actually had had a glimmering of something like this earlier. As I read Rothbard and Mises, I thought ‘How can the boom go on for so long? Why isn’t it all over within a few months?’

The Hayekian response to ‘The Hayek Story’ is in terms of Hayek’s metaphor of the pile of honey. This has always struck me as quite feeble. The ‘purely monetary’ theorists don’t dispute, they have always insisted, that inflation causes misallocation of capital. What they do deny is that this misallocation takes the form of an unsustainable lengthening of the production structure. And this bold vision of the Austrians is, I think, incorrect. Purely monetary disturbances are enough to account for the government’s role in creating slumps (though the government makes matters worse by other measures, for example trying to stop wages from falling at the end of a boom, which is precisely what ought to happen to get the slump over with quickly).

Actually, I now see a parallel between the Austrian trade cycle theory and other notions which used to be popular among libertarians. What a lot of these different notions share is the premiss that the spontaneous market order is a frail bloom that can easily be killed. So libertarians fifty years ago used to talk as if a welfare state or a lot of regulation would quickly take us to the Soviet system and thus the end of civilization.

The truth is that the market is amazingly resilient and capable of amazing adaptations, and this keeps growing all the time with higher real incomes and faster and more accurate communications. What this resilience means is that the market can take a lot of punishment and still function surprisingly well. And what that means is that a heavily regulated welfare capitalism is a lot less unstable than we used to suppose. Of course, deregulating would lead to greater efficiency and benefit everyone, and various crises will crop up now and then, like the crisis of the NHS in Britain and the crisis of ‘social security’ (old age pensions) in the US, but a continual heavy burden of regulation and unfortunate sabotage by government is compatible, as a simple matter of fact, with indefinitely rising real incomes for everyone. Or if you want to translate this into Randian terms, Atlas never gets round to shrugging because Atlas is doing okay, and both Atlas and the looters can keep on improving their situation indefinitely. Atlas doesn’t notice the burden because his muscles are fully up to it, and they improve their tone with every passing year, despite the increasing absolute weight of the looters.”
http://consultingbyrpm.com/blog/2012/05/federal-government-outlays-and-receipts-as-of-nominal-gdp.html#comment-39021

Some quick points:

(1) The author of this comment makes reference to a book by David Ramsay Steele called From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (Open Court, La Salle, Ill. 1992), which bears further scrutiny. I am also not quite sure what “The Hayek Story” refers to (a book, article, or seminar paper?).

(2) It is not correct to say there was no slump in 1946. A contraction of real output did occur, as the wartime command economy ended:

Year | GDP* | Growth Rate
1941 | $1,366,100 | 17.07%
1942 | $1,618,200 | 18.45%
1943 | $1,883,100 | 16.37%
1944 | $2,035,200 | 8.07%
1945 | $2,012,400 | -1.12%
1946 | $1,792,200 | -10.9%
1947 | $1,776,100 | -0.89%
1948 | $1,854,200 | 4.39%
1949 | $1,844,700 | -0.51%
1950 | $2,006,000 | 8.74%
* Millions of 2005 dollars
http://www.measuringworth.com/datasets/usgdp/result.php

But the point that the private sector was expanding in other areas at the same time is well taken: this period was one of massive capital conversion and liquidation, and yet unemployment did not become a problem and the normal private economy producing consumer goods expanded rapidly.

Jonathan Finegold Catalán attempts a response to this question in a way that I do not find convincing:

Jonathan Finegold Catalán, “WWII and Intertemporal Discoordination,” Economic Thought, 1 June, 2012.

It is not possible to deny that WWII, from a free market perspective, imposed pricing chaos on commodities in America. And the US still had price controls on many goods until late 1946, when a huge surge in private sector investment and employment was in progress.

From the Austrian perspective, there must have been “artificial lengthening” of the structure of production processes during the war, and ongoing capital projects in 1945 that were abandoned when the war ended. Also, there was a large contraction of real output or liquidation of capital goods, but the private sector managed to absorb the huge increases in the labour force and increase private investment.

If the Austrians really deny that there was no significant “artificial lengthening” of the structure of production during WWII, are they saying that Keynesian demand management (by demand contraction through tax hikes, bond issues, rationing and the command economy) was so good that it avoided such problems? If not, then what was the reason?