Cowen: "If I believed in Austrian Business Cycle Theory"

[cpacia]

Have you guys ever seen this from Tyler Cowen from 2005?

@Tyler Cowen

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well.

6. I would buy puts on T-Bond futures and become rich.

7. I would think that Hayek’s Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.

Of course that is not me. But at least someone appears to believe in Austrian business cycle theory. By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.

He looks like an ass now for writing that.

[cporter]

That is fantastic.

Does anyone have a good source for further information on #1 and the action of Asian central banks mentionedin #4?

[John_James]

That is just awesome. I had missed it, but of course Bob Murphy is all over that…

I have already blogged about the weird weird psychological event in which Tyler Cowen used Austrian business cycle theory to accidentally predict the financial crisis way back in 2005.

In August 2008, when his colleague Bryan Caplan was congratulating central bankers for their expert guidance of the world economy (can’t find the link, let me know if you guys can find it), Tyler wrote this in the NYT:

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings….

The third problem is that lower consumer spending will require the American economy to make some shifts. That may mean fewer Starbucks and fewer new homes but more tractor production for export to foreign markets. In the long run, shifting some consumption to investment is probably beneficial to the economy; in the short run it means job losses and costly readjustments.

As Mike Myers said in a Wayne’s World movie looking at his contract, “Yes, yes, I like what you’ve done here.”

OK so Tyler explicitly used ABCT to predict the financial crisis, then as it was intensifying he was ahead of the curve by using passages that pre-emptively plagiarized Murphy columns on what was needed for recovery, and now he (and a co-author) write this (HT2 David R. Henderson):

The story runs as follows. Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn’t so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble — plus it would have involved some morale costs with the more productive workers, who don’t like being measured and spied on. So firms simply let the problem lie.

Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving….

So how should we interpret the recent trickle of good news? Well, one positive note is that less-productive, laid-off workers are undertaking the needed adjustments. For instance, according to a survey by the Pew Research Center, nearly 70 percent of unemployed workers have already made dramatic changes in their career or job-field choice, or are considering doing so. There also have been migrations out of expensive urban areas and into smaller and less expensive ones, such as Austin, Salt Lake City, and northern Virginia, with relatively high-performing industries and more fluid labor markets.

In other words, the U.S. economy is going through some major structural shifts.

So workers were doing stuff doing the boom period for which they were overpaid and actually wasn’t productive, and now they have to be reallocated to different sectors where they will be making less. I think you guys are familiar with this story, since it’s what I’ve been saying for three years.

The only main difference I can see between Tyler’s explanation and mine, is that I see interest rates serve a very important coordinating function in a market economy, and that if the Fed massively distorts them, we shouldn’t be surprised at massive real distortions in the capital and labor markets.

Tyler rejects this theory, saying businessmen are too smart to be fooled by 1% (under Greenspan) fed funds rates. In contrast, Tyler thinks these smart businessmen don’t mind having zero-marginal product workers on their payroll when they are making a ton of money.

Search your feelings, Tyler. You are descended from the Austrian School. Mises is your father. Bernanke knows you have the power to destroy him. Join me, and together we will rule the blogosphere!

[Caley_McKibbin]

That is possibly the funniest thing in the history of economics.

Intertemporal Discoordination Theory

[liberty_student]

I don’t know why anyone cares what Tyler Cowen says.

[Prateek_Sanjay]

One veteran blogger, whom I won’t mention, while not particularly fond of libertarians in general, said that Ron Paul, Lew Rockwell, and Justin Raimondo at least stick to their guns (even though he didn’t like them much either), while Tyler Cowen and Pete Boettke were, as he saw them, “kepts” of rich donors. He even added that a more appropriate term for the latter two was “one from prison terminology”.

This is just one example.

Disregarding the rather snarky style in which the above mentioned posted, I realize that even anti-libertarians include many with a bit more grudging acceptance for those closer to Auburn than for those with Washington and mainstream inclined tendencies.

Another social democratic blogger regularly cites Rothbard and other Mises Institute members for their criticisms of supply-siders, monetarists, and other supposed free marketers, along with Raimondo’s criticisms of Objectivists.

[EmperorNero]

I have wondered why, since Austrians usually correctly predict financial crises, why they aren’t all rich because they made the right bets.

[Student]

Everyone seems to be missing the point of what Cowen was saying. It wasn’t to make ABCT sound silly, it was to suggest that Krugman/Delong/and others were actually making very Austrian arguments without realising it.

I would say it also looks like everyone is totally missing the mark by thinking Tyler’s summary comes anywhere close to predicting the subsequent recession. Here Cowen is essentially predicting a balance of payments crisis (set off by asian central banks). And that is simply NOT what happened.

It is also really not what most of you think happened either. Unless I missed a post where someone didn’t put the blame squarely on the good ol’ US Fed.

Were there any Asutrians at all agree with Paul Krugman and Brad Delong in 2005???

Anyways, I would say someone looks like an ass here, but it isn’t Cowen.

PS* This also exactly why you should be skeptical about Krugman et al’s claims to having predicted the 2008 financial crisis. In reality, events unfolded very diffrently than the way they thought they would. The only thing they truly got right was there would be a recession (which not remarkable since Krugman was vocally worried about a comming recession since 2003, he was bound to get it right eventually).

PPS* I remember this post when it first came out. It was right around the time I was getting interested in Austrian econ and inspired me to buy Hayek’s Monetary Nationalism. I was able to find it for like $10 on Half.com. Over all, I thought the book was underwhelming. But it did teach me that I actually find international monetary policy discussions incredibly boring (up to that point I was incredibly interested in international econ, but this was where my interest started to fad).

[Smiling_Dave]

Very good point, Student.

Note that the only reason it didn’t happen as he laid it out is because the Chinese and Japanese were stupider than anyone imagined possible. [See #4 in his article].

Also note that they have wised up. They no longer think the Good Lord put them on this Earth to pile up paper dollar bills. Which means that his article is more relevant than ever.

I missed where he mentioned or linked to Krugman.

P.S. Does Hayek kill your interest on every subject, or was it a one shot thing?

[Student]

^ So you think the Asian banks have “finally wised up”, but we have still not plunged into a currency crisis as Tyler’s hypothetical Austrian would predict? Are you saying that is a good thing or are you implying that the next crash is “just around the corner” again?

As far as Krugman goes, both he and Delong were making the same arguments at the time so I feel fine grouping them together. If you are less comfortable with that, pretend I just said “Delong”.

Did any Austrians vocally agree with Delong on these points in 2005? Out of the thousands of Austrians in the world someone must have, it would just be interesting to see who.

[Prateek_Sanjay]

Thank you for clarifying, Student.

Um, okay, I have to take a step back and reread that thing.

[Caley_McKibbin]

Everyone seems to be missing the point of what Cowen was saying. It wasn’t to make ABCT sound silly, it was to suggest that Krugman/Delong/and others were actually making very Austrian arguments without realising it.

Are you sure you are not confusing Austrian arguments with Austrian conclusions?

[Smiling_Dave]

Dear Student,

Answers to qs:

1. Yes.

2. Just around the corner. Thing is, I make no claim to how far away just around the corner is. In the Good Lord’s eyes, one thousand years is but a mere day. In the economic universe, causes may take time to yield their effects.

One of us will have a good laugh at the other in a few years.

3. Peter Schiff wrote a book about it in 2006. His wall street unspun radio shows from 2004, which can still be found online with a bit of digging, also say it over and over. Now I know there are those here who don’t consider him an Austrian, but Walter Block does.

[Epicurus_Ibn_Kalhoun]

If everyday you spout on about the coming collapse you do one of two things:

Assure that, at some point, you will be right. Collapse is a natural part of the system (not even the ABCT can stop recession. Overproduction is natural to capitalism.).

2. Create a possible self-fulfilling prophecy.

I dont have to wait for the future to have a good laugh at your expense… Im doing it right now

[Smiling_Dave]

EDIT: Spoke too soon. See next post.

[Smiling_Dave]

Laotzu, on further reflection, I am wasting a valuable learning experience.

Please explain to me why Capitalism is doomed to overproduction.

Also, please explain to me why other possible sytems, say Socialism, avoid the problem.

[liberty_student]

@Laotzu del Zinn

Assure that, at some point, you will be right. Collapse is a natural part of the system (not even the ABCT can stop recession. Overproduction is natural to capitalism.).

Overproduction and liquidation are natural to capitalism. It is a system of profit AND loss.

Your statement about the ABCT makes no sense whatsoever. Maybe stick to topics you do understand.

[Smiling_Dave]

Maybe stick to topics you do understand.

Who can hold himself to such an impossibly high standard?

[Epicurus_Ibn_Kalhoun]

Your statement about the ABCT makes no sense whatsoever. Maybe stick to topics you do understand.

I know it makes no sense, that’s why I said it. Some people think we would stop recessions if we all were followers of the ABCT. That’s simply not true.

@ Dave

If you don’t understand how overproduction is natural to capitalism, you don’t understand capitalism.

As far as how socialism would eliminate the problem… non sequiter. I never said it would, nor would it have anything to do with what I said in the first place.

[Smiling_Dave]

Quite possibly I dont understand Capitalism. Could you explain just that one detail please? How overproduction is natural to capoitalism?