I’ve recently been doing some work on the history of business cycle theories, through Marx, Keynes, RBC etc and (most relevant for my question here) Austrian cycle theory. Although, so far I’ve not had a chance to fully come to grips with Austrian theory. One of the main issues that has come out from my work is the importance of real uncertainty in distinguishing between the work of Keynes/Minsky and the neo-classical/RBC approach (and the endogenous/exogenous business cycle distinction). What is interesting to me about the Austrian approach is that it seems to accept Keynesian uncertainty, but still postulates exogenous causes for business cycle. This brings me to my question (sorry for the build up). Are there any Austrian economists who have examined Keynes distinction between short and long term expectations and considered their importance? The (small number of) Austrian writings that I have looked at seem to focus purely on adaptive market processes, in other words short term expectations. Long term expectations are fundamentally different because they are characterised by one shot decisions and there is no way that adaptive, experimental, processes can get the market to the “right” outcome. Keynes makes the distinction between firms setting output and employment (as short term adaptive processes) and firms deciding on whether to build a new factory (long term expectations). Once long term expectations are considered “herding” becomes more sensible and we move into a Keynesian “beauty contest” world.
Are there any writers who have explicitly refuted these points? I’d be very grateful if someone could point me in the right direction.
Karl Marx is closer to the austrian theory of the business cycle than one might assume. This is because he believed that an increase in labor supply would push down wages,and thus allowing firms to rehire again.
Although there are plenty of criticisms of Keynes’ economics in general, I am not sure if any of them deal specifically with Keynes’ business cycle theory. There are a few points which you should consider, though:
According to Friedrich Hayek, the Austrian Business Cycle Theory is endogenous. True, the central bank is pinpointed as one of the main causes for cyclical fluctuations, but the underlying cause is the “current credit organization”, or fractional-reserve banking. I have not read enough of Hayek to know how he changes his position since he first started writing on the topic, but he did believe fractional-reserve banking to be a natural evolution in the market. In any case, he spends some time discussing whether the theory is endogenous or exogenous in Monetary Theory and the Trade Cycle.
I don’t believe that Austrian capital theory would consider a lengthened structure of production as based on one decision to invest. As interest rates lower, an entrepreneur will look to extend the structure of production by adding phases of production. This is simplistic, but I think a good example would be of an entrepreneur looking to invest in a new car line. One phase of production would be the fabrication of the carburetor, which will be invested to make the final production (I stole this example form Jesús Huerta de Soto’s Money, Bank Credit and Economic Cycles). It’s true that perhaps non-Austrians consider structures of production one long, homogeneous phase. For example, although I am not very well read on the Cambridge Capital Controversy, it seems as if one of their main arguments against Austrian capital theory is “capital reswitching”. What this means is that as interest rates lower, certain forms of production become financially inferior to others. But, as interest rates lower even more, that same form of production may become once again economical. They believe that this disproves Austrian capital theory, but Jesús Huerta de Soto suggests otherwise. He concedes that it may be true, but given that production is dealt with in phases, when this occurs the cheaper form of production will be incorporated in a new phase.
If you read Jesús Huerta de Soto’s aforementioned book, he explains how entrepreneurs quickly respond to changes in the rate of interest, and so any theory that fluctuations occur because of lack of foresight and inability to change production once production has been undertaken does not hold.
Welcome. You’ve certainly come to the right place. Go to the Mises home page, click on Literature. Search your topic. Have you heard of Human Action, or Man, Economy & State? The answer to your specific question might not be there, but you will find the foundation of sound economics.
Holy cow. Keynesian “beauty contest” world?
Go to the home page. [:D]
Hmm, not sure I understand what you mean by this. It is possible that, by way this is phrased, you really don’t understand Austrian Busiess Cycle Theory. But that’s OK. This is the place to find out about it.