Paul Krugman’s:
John Quiggin:
Bryan Caplan:
http://econfaculty.gmu.edu/bcaplan/whyaust.htm ( VERY long article, section 3.4.2. is the relevant bit).
My friend forwarded these to me, I never heard of their refutes.. and quite frankly I don’t have time to read long boring crap like that. So if someone wants to take a look at these, then go on ahead. I want to see if ABCT really HAS been refuted and debunked .. or not.
Krugman’s “refutation” isn’t a refutation at all. His argument is that ABCT states that the recession is a moral punishment for bad investments in the boom.
is abct even real??? is it a refutation of something that isnt true anyway??
is it a shortened term for theories actually posited by people from the early 20th century???
someone called menger??
… I smell troll on you…
What I’d really like to hear for a refutation is why a central bank setting the interest rate by its own whims would not cause misallocations in the structure of production.
The Bryan Caplan one is just that, however its very long.
Agreed, its a waste of time. Long winded usually == wrong.
Robert Murphy - Correcting Quiggin on ABCT
Replies to Caplan
“Economic Science and Neoclassicism”, by Jörg Guido Hülsmann
“Austrian Theorizing: Recalling the Foundations”, and the errata, by Walter Block
“Kaldor-Hicks Efficiency and the Problem of Central Planning”, by Edward Stringham
“Probability, Common Sense, and Realism: A Reply to Hülsmann and Block”, by Bryan Caplan
“Realism: Austrian vs. Neoclassical Economics, Reply to Caplan”, by Walter Block
“Probability and the Synthetic A Priori: A Reply to Block”, by Bryan Caplan
Replies to Krugman
“Contra Krugman”, by Roger Garrison
“Epstein Responds”, by Gene Epstein
“The Hangover Theory?”, by John P. Cochran
“Keynesian Confusions”, by David Gordon
“Rejoinder to Caplan on Bayesian Economics”, by Walter Block
This is a quote taken from the article:
“The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account.”
Thomas E Woods provides an answer to this object in his book Meltdown. He says the following:
“A reasonable objection to the Austrian explanation runs as follows: why can’t businessmen simply learn to distinguish between low interest rates that reflect an increase in genuine savings, and low interest rates that reflect nothing more than Fed manipulation?..The answer is that it is not so easy. (First of all even most economists are unaware of Austrian business cycle theory, and it is a rare business school in which the subject is taught.) Even businessmen who do know the Austrian theory and who know with absolute certainty that the Fed is keeping interest rates artificially low may still find it in their interest to borrow and launch new projects, hoping their project will be one of the lucky ones and that they can get out well before the bust hits. If they sit back and do nothing, and do not react to the lower rates, their competition surely will, and might be able to gain market share at their expense.****” pg75-76
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This has to assume to the entrepreneurs would know what the real market interest rate is.
Maybe I’m being dense… but if his argument in favor of a central bank’s manipulation of interest rates is that businessmen will eventually learn to ignore the artificially low rates, then what does he think is the point of lowering the rates in the first place?
Isn’t this what we’re seeing now? The Fed has held the rate below 1% for an extended period and still no one’s biting, because they are aware of the looming bust.
Doesn’t his argument imply that a disproportionate amount of available credit will go towards businessmen who ignore or don’t realize that the interest rate is artificially low? Also that businessmen who are keen enough to understand that the interest rate is artificially low will be systematically less likely to expand their businesses? Wouldn’t this dynamic, where credit is going to the irresponsible at the expense of the responsible, only fuel the bubble?
I could maybe see the argument that some businessmen’s hesitancy to capitalize on artificially low rates could have a temporary dampening effect on unsustainable credit growth, but certainly not enough to level-out the cycle.
Of course, when government bails out the losers and pays their gambling debt anyway, he has no argument whatsoever, because then there’s absolutely no incentive not to gamble with that cheap credit.
Actually, eventually they do take it into account, which is why the inflation rate must accelerate at an ever faster pace.
Caplan’s criticism of the ABCT has always been trivially stupid. Besides everything that’s already been said, it would only apply if ABCT were accepted as true. But, it’s not. So everything he wrote is irrelevant.
Because ABCT isn’t accepted as true, he can’t say that businessmen will take low interest rates into account. Why should they!? People like Caplan are telling them NOT to take it into account.
Caplan CANNOT simultaneously:
Say that ABCT is not true because businessmen take it into account
Say that businessmen don’t need to take it into account (<— this is what saying ABCT is not true entails) because it’s not true.
As we see, if businessmen followed Caplan’s own advice, it would make Caplan’s statements about ABCT incorrect!
Caplan may counter by saying, well, if businessmen generally take it into account, then you don’t get a business cycle, and if they don’t take it into account, then yes, you may get instability. But, again, they most definitely are not taking it into account because ABCT simply isn’t well known, and secondly, people like Caplan are telling them that ABCT doesn’t exist in practice.
And yes, the other commenters are correct in pointing out that businessmen wouldn’t know what the market rate of interest should be… basically they have no way of calculating because they don’t know how much of their business surroundings are real and how much is artificial.
Caplan’s criticism would not apply even if the Austrian business cycle theory was widely accepted. Entrepreneurship is innate within the human spirit, and while humans cannot calculate the natural rate of interest and cannot calculate for what length of time the inflation will accelerate they will continue to borrow accumulated capital and invest it.
ABCT could also be renamed “central bank business cycle theory” or CBBCT.
The most unknown part of economics is “money”. Since we are still defining what money is…and .because money is the “nature” of ABCT, it is understandable how MANY could think trash of it.
The ABCT has different names, including the credit theory of the business cycle.
Not really, since a central bank isn’t necessary.
ABCT does not necessitate the existence of a central bank.
True…but it is elemental to my opinion since money or legal tender are issued worldwide by central banks. They are responsible for Credit, money, or monies in circulation.
This is a very point. I think Caplan is ignoring how interest rates are manipulated.
The wonder of a decentralized economy is that I don’t have to take a survey of how many sweaters are currently for sale and how many people want the sweaters, and how badly. I simply look at the price and decide if I want to purchase at that price. The price itself will make sure there is a sweater available for everyone willing to pay the price (markets clear, in other words).
If the price of sweaters were suddenly to be lowered, even if I knew they had been artificially lowered, it doesn’t mean that I know how many sweaters there actually are and whether or not I should get in line (there will be a waiting line now) to get one. Am I one of the ones who would have purchased the sweater at the market price? Hard to know without knowing what the market price is/would be (I only know that it is higher than the current asking price).
The Fed does not directly manipulate the interest rate. They inject (false) liquidity into banks which then respond by lowering the interest rate (markets clear, in other words). If businessmen suddenly, en masse, grew leery of accepting loans because they knew the Fed had injected liquidity, this would simply cause the bank to keep lowering the interest rate until they found takers for their loans (markets clear, in other words). And supposing that businessmen would, en masse, reject loans requires several highly dubious propositions. One, that there are no half finished projects that someone wants to finish, or at least that, being half-way done with a project, a businessman will not take a loan to finish it until the Fed withdraws the excess liquidity. Two, that there are no businesses on the verge of going under who might delay or avoid bankruptcy with a loan with a low rate of interest. Three, that there is no one who thinks they might expand their market share with a cheap loan now and get out before the collapse later.
Caplan fails.
I realize that the questions I pose on this blog post are simple, but they were to generate discussion and to clarify a few points. I wonder what your opinions on free banking theory are.