Z,
I definately don’t think I am confusing the no-credit-expansion v. credit expansion arguments.
Below you will find a modified version of what I’ve said before about what I think are the differences between Garrison and Rothbard. Hopefully that will clear things up. Link and quotes are provided to illustrate what I see as being conflicts (important points are bolded or underlined).
PS* Writing these posts and digging up these quotes is taking forever and no one seems to be reading them that closely (at least not krazy kaju or liberty student). I’m not saying anything in the post below I haven’t already said previously in the thread (or last year as a matter of fact when I first called out the apparent differences). Not much I can do about it now I guess since I’ve already written it up. Just wanted to vocalize that this convo is getting tiring. I think the best thing to do is to let this sit for a day or two. That way, folks have an actual chance to read the articles and portions of the book being linked and decide for themselves. Feel free to PM me if you have questions.
–
Quick Summary of Differences Between Garrison and Rothbard
Basically the difference is that Garrison thinks investment and consumption rise together during the boom, Rothbard does not. This sounds like a small difference, but if you read critiques by Bryan Caplan and Paul Krugman you will find that there are significant problems with Rothbard’s approach (two being 1) measured investment and consumption do seem to together during booms and fall together during busts and 2) rothbard’s theory imples that consumption goods industries should thrive and that their prices should rise during recessions and we simply do not see that either).
For more detail see below.
Garrison’s Theory
Garrison clearly believes that investment and consumption should rise in tandem during the boom phase. As he says in his 2004 article in the History of Political Economy, “Credit expansion increases both investment and consumption without there being any corresponding curtailment.”
http://www.auburn.edu/~garriro/strigl.htm
This is important for Garrison’s theory because it is the fact that rising investment and consumption are pulling resources toward the early and late stages of production and away from the middle stages. As a result, existing capital goes under maintained and eventually can longer produce the same ammount as before:
Overconsumption and Forced Saving in the Mises-Hayek Theory of the Business Cycle (Garrison, 2004)
The low interest rate that accompanies the boom phase of a credit expansion directs resources to the early stages of production. But at the same time, the increased demand for consumption goods is accompanied by an increased (derived) demand for resources in the very late stages. Resources are pulled in that direction, too. For a time both kinds of policy-induced misallocations can occur, as depicted as a double distortion of the Hayekian triangle. The misallocation of resources (both malinvestment and overconsumption) shown in Figure 2 corresponds to the economy that has reached the hollow diamond point along the adjustment path that extends beyond the PPF. The Hayekian triangle shows resources being allocated away from middle stages of production in both directions. This movement would translate into Strigl’s account of the unsustainable boom as increased consumption and increased long-term capital creation, both made possible, in part, by the undermaintenance of existing capital.
…
Not far [into the boom phase] the limits imposed by scarcity become increasingly binding, but the low rate of interest continues to favor investment over consumption. At this point it does matter that the investment community gets the new money first. Resources continue to be bid into the early stages, while production processes that were in their middle stages at the beginning of the expansion—and from which resources were being misallocated at point 1—now begin to yield a declining volume of consumables.
http://www.auburn.edu/~garriro/strigl.htm
Rothbard’s Theory
By contrast, Rothbard does not see investment and consumption rising together. instead, investment rises first during the boom as new money first enters the loanable funds market (pushing down interest rates and encouraging investment in and it is only after “new money percolated downward” as income to the original factors of production that we see a rise in consumption. Indeed, in Rothbard’s account, it is this increase in consumption that reveals to businesses that savings have no in fact increases (that time preferences have not changed) and that investing in more roundabout methods of production was a bad idea. Below you will find quotes from both MES and AGD demonstrating Rothbard’s argument.
America’s Great Depression (Rothbard):
Now what happens when banks print new money (whether as bank notes or bank deposits) and lend it to business?[6] The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. Now, when saved funds increase, businessmen invest in “longer processes of production,” i.e., the capital structure is lengthened, especially in the “higher orders” most remote from the consumer. Businessmen take their newly acquired funds and bid up the prices of capital and other producers’ goods, and this stimulates a shift of investment from the “lower” (near the consumer) to the “higher” orders of production (furthest from the consumer)—from consumer goods to capital goods industries.[7]
If this were the effect of a genuine fall in time preferences and an increase in saving, all would be well and good, and the new lengthened structure of production could be indefinitely sustained. But this shift is the product of bank credit expansion. Soon the new money percolates downward from the business borrowers to the factors of production: in wages, rents, interest. Now, unless time preferences have changed, and there is no reason to think that they have, people will rush to spend the higher incomes in the old consumption-investment proportions. In short, people will rush to reestablish the old proportions, and demand will shift back from the higher to the lower orders. Capital goods industries will find that their investments have been in error: that what they thought profitable really fails for lack of demand by their entrepreneurial customers. Higher orders of production have turned out to be wasteful, and the malinvestment must be liquidated.
http://mises.org/rothbard/agd/chapter1.asp#boom_and_depression
Man, Economy, and State (Rothbard)
First, the money supply increases through credit expansion; then businesses are tempted to malinvest—overinvesting in higher-stage and durable production processes. Next, the prices and incomes of original factors increase and consumption increases, and businesses realize that the higher-stage investments have been wasteful and unprofitable. The first stage is the chief landmark of the “boom”; the second stage—the discovery of the wasteful malinvestments—is the “crisis.” The depression is the next stage, during which malinvested businesses become bankrupt, and original factors must suddenly shift back to the lower stages of production. The liquidation of unsound businesses, the “idle capacity” of the malinvested plant, and the “frictional” unemployment of original factors that must suddenly and en masse shift to lower stages of production—these are the chief hallmarks of the depression stage.
http://mises.org/rothbard/mes/chap12f.asp#11B._Credit_Expansion_Business_Cycle