A friend of mine sent me the wiki “Critiques” of Austrian Business Cycle Theory.
The red flag I noted was the line Nobel laureate Paul Krugman
I was wondering if anyone had any thoughts on these points.
I haven’t read up on the crashes that they speak of - any thoughts on these “Critiques”?
Critiques
The Austrian theory of the business cycle is now rarely discussed by mainstream economists, but was more actively debated in the mid-20th century.[41] Nobel laureate Hayek’s formulation of the theory in the 1930s was harshly criticized by John Maynard Keynes, Piero Sraffa and Nicholas Kaldor. In 1932, Piero Sraffa argued that Hayek’s formulation of the business cycle required a kind of money that was entirely neutral, and was in effect a simple commodity, unable to act as a store of value or be loaned at interest.[42] Hayek reformulated his theory in response to those objections, but his reformulation was then criticised by Nicholas Kaldor in 1939 [43] and again in 1942.
More recently, mainstream economists like Nobel laureate Milton Friedman,[6][7] Gordon Tullock,[8] Bryan Caplan,[9] and Paul Krugman[10] have stated that they regard the theory as incorrect. David Laidler views the theory as motivated by the political leanings of its major proponents, as Austrian economists are known for their strong opposition to government involvement in the economy, and argues that the theory was discredited because of its association with “nihilistic policy prescriptions” for the Great Depression. On the other hand, Laidler also stated that its core insights were materially worthwhile, especially as related to the work of Dennis Robertson.[44]
In 1988 Gordon Tullock explained his disagreement with the theory.[8] His main point is that “if the process that Rothbard describes did occur, there would be many corporate bankruptcies and business people jumping out of the windows of office buildings, but there would be only minor transitional unemployment. In fact, measured GNP would be higher as a result.” This is because the Austrian theory implies fluctuations in investment, but not in the production decisions of firms. Nobel laureate Paul Krugman also made a similar argument when he stated that the theory implies that consumption would increase during downturns and cannot explain the empirical observation that spending in all sectors of the economy falls during a recession,[10].
Mainstream economists argue that the theory requires bankers and investors to exhibit a kind of irrationality – that they be regularly fooled into making unprofitable investments by temporarily low interest rates.[8][9][45] Critics have also argued that, as the theory points to the actions of fractional-reserve banks and central banks to explain business cycles, it fails to explain the existence of business cycles before the establishment of Federal Reserve in 1913. For example, the Panic of 1873 would initiate the Long Depression in US and much of Europe. Additionally, there were also severe market crashes in the United States of the magnitude of the 1929 crash in 1869, 1882, 1884, 1896, 1901, and 1907; there was no central bank or national monetary policy in the US during these crises. In fact, the movement to establish central banking in the United States was in part a response to the business cycle, particularly the Panic of 1907.[46][47]
Mainstream economists believe that economies have experienced less severe boom-bust cycles after World War II, since central banks have started using monetary policy to stabilize economies[48][49][50] – see especially The Great Moderation.
