Any ABCT agnostics out there?

Economics Economics Questions
1

What, if any, are the major disagreements over the Austrian Business Cycle Theory within the Austrian School? I’m well familiar with the theory as put forth by Mises and Rothbard, but are there any significant disagreements or caveats that not everyone in the Austrian School agrees with?

Does anyone have any major disagreements with the following essential (and watered-down) premise of the theory: newly printed money, to the extent that it is lent to businesses, generates a boom that must be followed by an equal and opposite bust, due to the fact that the money being invested does not represent true savings/consumption proportions of the consumers.

2

Hayek agreed with Mises’ conclusions but not his methodology, if I recall right.

3

Well, there are some minor deviations within the school. Mises and Hayek viewed the inflation that starts the boom as defined by an increase in the money supply exceeding the demand for money, while Rothbard defined inflation as any increase in the money supply not backed by an increase in the commodity it is backed by(gold). One difference here is that Rothbard viewed the solution to business cycles as requiring 100% reserve banking, while Mises(debatable) and Hayek viewed the solution as requiring free banking(which may happen to overlap with 100% reserves, but doesn’t require it to).

One other caveat Hayek(and some people argue Mises) had with ABCT, is that the debt deflation occurring during the bust decreases the supply of money relative to the demand to hold money,causing an increase in real cash balances and a decline in spending, leading to a secondary deflation. This perspective implies that increasing the money supply to meet the demand to hold money after the bust occurs can ward off secondary deflation, as they may argue the secondary deflation is not necessary for the reallocation of capital and recoordination of production. This view is especially popular with Austrians such as George Selgin, Lawrence White, Steve Horowitz, and Bill Woolsey. Of course this conclusion has the practical problem of increasing the money supply neutrally with respect to the coordination of production and allocation of capital.

Other than defining what the inflation that sets off the bust, there are no disagreements with the mechanisms of the business cycle in ABCT. Some touch on different topics that others. For instance, the monetary equilibrium guys(Hayek, Selgin) like to explain how increasing the supply of money without an increase in demand cause a decrease in real cash balances and an increase in spending, which drives production beyond the production possibility frontier(Hayek, Garrison) and an overexpansion of firms and overutilization of capital and labor.

4

There is no debate when it comes to the core fundamentals, but there are a few Austrian school free bankers. Free bankers are people who oppose full reserve banking. George Selgin and Lawrence White are two Austrian free bankers.

I tend to agree with the free bankers. I see no problem with taking money out of irregular deposits and lending it out. It doesn’t actually expand the money supply (unless you double count) and it increases the efficiency with which saved resources are used and invested.

I would also say that price deflation - of any kind - is bad. It prevents the market for loanable funds for clearing properly, which further reduces the efficieny with which savings are used. In a pure free market, price deflation would be avoided, since it would increase the profitability of currency production.

5

? [*-)] ?

6

Well, it’d probably be more accurate to say that they oppose mandatory full-reserve banking. In a truly free economy, banks would only be forced to keep the amount of reserves they stipulate in their contracts (in other words, there’s no central authority making fractional-reserve banking easier, just as there is no central authority making full-reserve banking mandatory). I do think, however, that fractional-reserve banking would be much less prevalent, as there’s no FDIC to reimburse consumers if a bank becomes insolvent.

7

perhpas ther eis disagreement on the the effects on inflation as well…

one view…

"“In an online debate with the Atlantic’s economics writer, Megan McArdle, Shell observes with disapproval that, when prices are adjusted for inflation, Americans today spend '40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s. Over that same period, Census Bureau tables show, US median household income rose by at least 18% in constant dollars . . .”

http://blog.mises.org/archives/010741.asp#c604991

but then…

“There was economic growth, but it was not spectacular after 1973, when real wages grew stagnant for two decades. The stock market did not outperform general economic growth. After taxes, it did not match economic growth.”

http://www.lewrockwell.com/north/north555.html

"Recently, my friend Bob Anderson was in a Costco discount store. His wife pointed to a pair of irons. One cost $79. It was imported from Germany. The other cost $23. It was imported from China. Westward the course of price-cutting goes!

For a consumer with a job, it’s fat city. For a manufacturer, it’s bad moon rising."

http://www.lewrockwell.com/north/north74.html

"The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even some Keynesian economists admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. The Fed’s easy credit policies have created an artificial mortgage boom, enabling many Americans who would not have met credit standards 30 years ago to buy houses. So demand for rentals has diminished, causing rental housing prices to drop and distorting the CPI downward. However, everyone knows the cost of purchasing a home has increased dramatically in the last ten years. Home prices in many regions have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make.

The prices of many other goods and services, including medical care and energy, also have increased substantially in the past decade. Commodity prices in particular have risen recently. In fact, broad indexes show commodities have risen 49% since last spring! "

"Whereas, in 1989–96, it took 12,000 hourly salaries to buy the transaction-weighted average house – 6 yrs and 11 months at the then-average work week – it now takes 15,855 hours – 9 yrs and 5 months at today’s workweek (50 week working years assumed in both cases) – for an increase of 36% per home in the ratio…

"“Deflated by the CPI (stop laughing at the back), turnover has risen 175% (+10.7% annualized) over the past decade. Prices/CPI have risen 41% from the 89–97 mean and have beaten CPI by 8.9% annualized since Q3 2001…???”

http://www.lewrockwell.com/bonner/bonner31.html

“If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line. If real GDP growth is so high, tell me why this economy hasn’t created any jobs over the past four years. High productivity? Nonsense, in part – statistical, hedonically created nonsense. My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less…Here, we have spectacular evidence of moral hazard. The very entity that owns the printing press is “measuring” the depreciation of its monetary unit while also measuring economic growth. The rating agencies must come to understand that the federal government is putting out works of fiction with respect to the CPI and to GDP growth.”

http://www.lewrockwell.com/englund/englund18.html

“Average wages are not keeping up with the cost of living. This has given rise to claims that we live in the first sustained period of economic growth that has failed to offer a similarly long increase in real wages. Indeed, wages have declined in real terms by 2 percent in the last three years.”

http://www.lewrockwell.com/rockwell/worse-off.html

" the average American is now suffering directly from the problems of employment, wage stagnation and decline, soaring inflation in housing, energy, food, education, retirement and many of the other biggest costs in their lives. As they say, they are struggling more and more to make ends meet – running faster on the treadmill and still falling further behind…"

http://www.lewrockwell.com/douglas/douglas17.html

Well, let us consider, then, some of the price increases that have skewed the CPI so as to cause the entire index to rise so dramatically over the same period of time. Medical care has gone up 45% since 1996. Education has gone up 80%. Housing has gone up 33%. Energy prices have soared more than 100%. Now, given these figures, and excluding the deflationary sectors, it should be clear that the CPI should be rising much more than it is.

And yet even by the standard measure, the increase of inflation in our times has led to declines in real wages over the last three years"

http://www.lewrockwell.com/rockwell/govt-doing-to-money.html

maybe there are just lies being told…agnosticism may have nothing to do with it

8

What is wrong with price cuts due to produtivity increases?

9

Free bankers don’t “oppose full reserve banking.” We would impose no restriction on bankers’ freedom to set their own reserve ratios. Overwhelming historical evidence indicates, however, that given this freedom, they would tend to set low ratios. 100-percent reserve “banking” (quotations because it’s really an oxymoron) has, in contrast, been a historical rarity.

Our Rothbardian critics, on the other hand, oppose fractional reserves. The difference matters!

10

Wouldn’t that discredit a lot of work done on fractional reserve banking being a cause of the business cycles during the 19th century?

11

It would.

12

I don’t recall Rothbard ever saying ‘Let’s coerce business bankers into full reserves’. I think he merely stated that fractional reserve banking cannot work on the market and if it did, it usually involves some form of fraud or implied coercion of the state behind it.

13

If you are just lending out money and saying to the holder ‘Hey we’re lending out $ 20 dollars of your deposit out of $50 dollars, your remaining total is $30’ then I think there may be grounds for some form of fraud [ if you didn’t agree to it ] however that is not the totality of fractional reserve banking. They lend out this 20 dollars and still say you still have 50.

14

He’s pretty explicit on the point of making fractional reserve banking illegal on the grounds that it is fraud, though he mentions that free banking is an attractive alternative.

15

Because in modern times it is. Not many people actually know what fractional reserve banking is. If a customer opens a bank account without the expressed knowledge that their money isn’t actually going to be there, that it is just actually numbers when they look at their statements, then it is fraud. On a free-market fractional reserve banks could not survive. They would be constantly called in for repayment [ and not have it ], they would not have FDIC, they would be open to bank runs and not survive them.

16

I agree. What I meant by my statement was that many Austrians want to enforce full reserve banking, while free bankers support complete deregulation of banking.

Not necessarily. There’s a difference between fractional reserve banking as it is conceived of today (banks lend their reserves) and FRB as it was conceived during the 19th century (banks issue paper certificates in excess of their reserves). Obviously, when loans exceed reserves, then there is credit expansion that is not in line with consumption/saving preferences. However, no free market bank would be able to issue loans in excess of reserves, since they would quickly be forced to fail in a run (see, for example, the Panic of 1792, when Alexander Hamilton intervened to prevent a bank run).

The difference this century is that banks are legally prevented from using 100% of their reserves. Instead, they are required to hold 10% of their reserves. So before, when subsidized by government, banks used over 100% of their reserves, which caused bubbles and panics, now, when legally restricted by government, banks don’t use as much of their reserves as they could.

Rothbard claimed that fractional reserve banking was not consistent with property rights, so it should be illegal. He supported mandatory full reserve banking. I disagree with Rothbard’s view from a property rights point-of-view since it is possible that a depositor can agree to a contract with a bank that allows the depositor to withdraw his money at any time, while allowing the bank to lend that money out.

17

Please show me where Rothbard openly states that we should coerce banks into having full reserves, not merely saying that they won’t survive.

18

When the price level falls, this causes the real rate of interest to rise. It essentially creates a price floor for the real rate of interest, which in turn causes the loanable funds market not to clear if real interest rates are supposed to fall but nominal interest rates have hit their limit of 0%.

In other words:
The real interest rate at which the loanable funds market clears is 3%.
The price level is falling at 5%.
Thus, to bring the loanable funds market to equilibrium, lenders would have to charge -2% nominal interest rates.
Thus, it is more profitable and less risky for lenders to simply withhold their money from the market, causing a shortage of loanable funds, which increases interest rates, reduces the productivity of saving, and lowers economic growth.

19

http://mises.org/rothbard/mes/chap11c.asp#6B._Claims_to_Money

A few paragraphs down:

“It should be clear that this practice is outright fraud. Someone else’s property is taken by the warehouse and used for its own money-making purposes. It is not borrowed, since no interest is paid for the use of the money. Or, if spurious warehouse receipts are printed, evidences of goods are issued and sold or loaned without any such goods being in existence.”

In other books/essays (I don’t remember which), he considers it fraud even if the contract between the client and the bank explicitly says the deposited money will be lent out, and that withdrawals cannot always been guaranteed. I think it’s somewhere in What Has the Gov Done to Our Money or Case Against the Fed, I forget.

20

You stated it yourself. If fractional reserve banking is a form of fraud or embezzlement, then it must be illegal from a natural rights point of view. It’s rather well known that Rothbard believed that full reserve banking should be legally mandatory. I’ll find a citation for you later.