This paper.
I’ve read it carefully and studied it. This is how I understand it:
It is not an increase in money supply in and of itself that causes the business cycle. Rather it is the institution of the Government that causes all recurring clusters of errors including this particular and important one. This is due to the nature of errors and error cycles i.e we cannot make the a priori claim that between an expansion of the money supply and its much written about effects people have no choice but to err. In fact their expectations could quite likely correctly anticipate the events and no malinvestment and overinvestment (Garrisonian definitions) need occur. Thus business cycle theory (if to be built on a priori grounds) must not be consequentialist but essentialist. Institutions can be defined as “more or less permanent patterns of actions” and an essentialist approach to BCT must look for an institution where error is inherent. Such an institution is the Government. There is so to speak an “illusion” inherent in government . Each man thinks he is benefiting from collectivizing some certain good or service even though opinions may conflict on which ones or how to do it etc. etc. This leads to voluntary servitude. Of course all this does is distort market signals as established by property rights and leads to the impossibility of economic calculation. Thus we have the institutional and essentialist grounds for regular run of the mill ABCT. Following from this we can analyze how an expansion in money supply in a quasi government system of Free Banking or in a government system of central banking and fiat money leads to a repetitive error cycle. However what we cannot do is explain why an increase in money supply necessarily must repeat itself forming an error cycle in the absence of these institutions.
Now this understanding of the paper portrays it as a lucid and clear argument, even if incredibly summarized.
However this is because what I wrote above I neglected two elements of weakness, or simply things I do not understand.
Firstly, there is an emphasis on repetitive error cycles. It basically lays out the case that government is the only reason why people seemingly can never learn from their mistakes. However it neglects to treat singular large error clusters with any degree of seriousness. The paper basically admits that large clusters of errors will be perfectly possible on the free market barring the tacit assumption that people will adapt their expectations given the correct institutional structure (in this case lassiez-faire). The paper identifies (without much substantial argument) that any institution of FRB formed on the free market and not made illegal by the actors in this market is necessarily government. It also identifies FRB with the business cycle (which is a point of much contention although I do understand Hulsmann deals with this in other papers I am yet to study seriously) thus immediately discrediting any business cycles caused in this fashion as free market phenomenon. Now, taking all this into account all the paper seems to say is that under Government Business Cycles are expected and perfectly predictable and that under a Free Market they would be random and dependent on some probability distribution of specie mining activity.
Secondly the paper is very very very incredibly unclear whether it comes to the simple question will a sudden large increase of gold money lead not to an error cycle but at least one large singular cluster of errors? As mentioned in my first contention there seems to be a tacit assumption that people’s expectations would somehow (although it is never really explained) be better in the institutional background of a free market than they would be with government, and that this leads the question to be answered in the negative. There is some small amount of treatment of this question (the affects of an expansion of the money supply) in a small hypothetical about a well respected bank and the devious heir to the bank, and in this treatment the answer seems to be in the positive. However since the ploy of the example is fractional reserve banking it becomes a rhetorical device into making the reader think that such is only possible in this quasi governmental practice. As such Hulsmann consistently (and I agree with this) concludes that this is only a one time effect and only becomes cyclical if FRB were to become a prevailing institution. It dodges a bullet on the increase of gold money question by using Rothbard’s (bad) definition of inflation as an increase in the money supply above the increase in specie money. Thus basically this paper makes the argument that either
A) A Large increase in gold is not inflation and will have zero effect on the rate of entrepreneurial error or
B) The large increase in the money supply will indeed bring about a boom and bust but given an institutional setting of a free market there is no reason why this would necessarily be cyclical or
C) People can only make large clusters of errors with governments around so a large increase in the supply of gold or money for any reason will not do anything as their expectations (barring the existence of government) are the same amount of correct and incorrect no matter what kind of changes happen to the money supply
A) and C) of these possible arguments seem lacking and would need much much much more treatment in order for me to accept any one of them, or any rational man to accept any one of them. B) Seems to be the only that makes sense
Now don’t get me wrong I think this is a very good and internally consistent work by Hulsmann who is one of my favourite economists and a great contributor to new austrian macro economic and banking theory and is one of the best proponents of the 100% reserve camp. However I cannot but help to think that the conclusions he draws from this paper are largely in error or that I am largely in error from misunderstanding him.
In either case the paper is a great work in grounding ABCT onto a more firm praxeological ground which analyzes the role of institutions in human action. In fact it provides the best treatment of the cyclical nature of boom and bust available to this day. However it does not provide a viable alternative to the knowledge argument (which is a great argument mind you) in explaining each singular boom and bust error cluster. In seemingly neglecting this it indeed cannot be considered a praxeological theory of boom and bust cycles as it never accounts for why boom or bust need happen just why they can happen again after they happen once.