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« Don't Look to Political Parties for a Solution? | Main | Congratulations to Pete Leeson --- 2011-2012 Emerging Scholar Award »


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Is there any way that we can access the Prychitko article online? It is nice to see that the Austrians are finally addressing some of the "financial market instability" arguments made by people like Hyman Minsky. I have been saying this for years (since 2008): Austrians need to seriously improve their conception of financial markets (i.e. they need to abandon the loanable funds model). It is nice to see Dr. Prychitko writing up a paper on Hyman Minsky. May I please view it? Dr. Prychitko, would you mind just emailing me the paper to

This is an impressive list and demonstrates that Austrian economics is a progressive research program. I'm pleased to see the winner from Denmark, showing international participation.

I am flabbergasted by the comment that Austrians have a loanable funds model. A central tenet of Austrian economics is that interest is not the price of money and is not determined in the money market. Please read Garrison's chapter on capital theory in The Economics of Time and Ignorance. Just to start.

Dr. O'Driscoll,

I am sorry, what I meant to suggest is that Austrians assume that there is a direct correlation or link between saving and investment absent government manipulation of the money supply. So, if people forgo consumption and instead decide to save, that will send signals to entrepreneurs that people's time preferences are much higher, and so investment in real capital goods is warranted. Is this no longer the case? I am referring specifically to the Horwitz-Hill debate in the pages of the Critical Review. Hill directly calls Horwitz out on this point, and Horwitz mentions it nowhere in his reply article to Hill.

Great choices for the FEE prize. Congratulations to the winners.

Austrian away,

They don't "assume," but analyze how the market process coordinates saving and investment. I'll let Steve Horwitz speak for himself.

Yes, I don't mean to pollute this comments section with obloquy, but I would only point out, Dr. O'Driscoll, that Austrians err in their "analysis" of the coordinating properties of the market system by failing completely to distinguish financial markets from industrial markets. You read people like Greg Hill and Fiona Machlaclan, scholars who are deeply learned in the Austrian tradition, and that is the conclusion they invariably come to. The conclusion is also supported by Horwitz's performance in the Hill-Horwitz debate on this very point. This, incidentally, was a part of Dr. Davidson's critique of your Time and Ignorance book (i.e. liquid assets and capital goods are not gross substitutes).

Congrats to all the winners. Especially my former student Nick Snow and my current student GP Manish! Keep it up guys.

Congratulations!! Excellent choices.

On the little debate above,I don't understand the criticism offered (by austrian away). Maybe its because I don't remember the details of the Critical Review discussion. But, if what is being implied is that Austrians do not admit the possibility of "disruptions" in financial markets (a la some classical smooth function system in which savings are inevitably and immediately connected to investment), then this is just not true - and seriously distorts their position. In relation to the Prychitko article have a look here:

Like Peter Lewin, I was perplexed by the criticism. The Mises/Hayek business cycle theory is an analsyis of how the plans of savers and investors become uncoordinated.

I will reiterate something I've said before. Discussion are more productive if people cite or reference the actual work of an actual human being (e.g., Hayek), rather than a mythic "Austrian" position.

Maybe I am missing something here, but are you guys not aware of the criticisms that have been made of the "Mises/Hayek business cycle theory?"

I have written all this up before, so I will just post links. Basically, there is NO reason to suppose that the actions of savers, unimpeded by government mismanagement of the money supply, will in any way inform the decisions of entrepeneurs as to when it is appropriate to invest in long-term capital goods.


Paul Davidson criticism of O'Driscoll:

Greg Hill criticism of Horwitz:

Stocks-Flows debate:

I mean, these sort of things are FATAL to the Austrian business cycle theory. I am just trying to get Austrian scholars to acknowledge these very insightful points. That is what got me excited when David Prychitko wrote an article addressing Hyman Minsky's excellent Market Instability Hypothesis. Unfortunately, he addresses the argument ONLY in the context of the Austrian business cycle theory (with all of its questionable assumptions, such as the coordination of plans of savers and investors).

Again, my apologies for polluting this comments section with these posts. Congratulations to all the winners of these prestigious Austrian prizes!

Oh ok, I will read the blogs - it would be nice to know whom I am addressing and whose blogs I am reading.

But, in any case, I think I already know the essence of it - something I wrote about in a comment on Roger Garrison's paper to a conference at Hillsdale College many years ago.

The act of saving is the act of postponing consumption, of transferring a specific demand today to a non-specific demand sometime in the future. So, there is no way to for any entrepreneur to know what exactly the savings, the future consumption power, will be used for. There is no signal for future goods akin to the price signals in current markets. Though true is not such a profound point. It suggests that we cannot guarantee that entrepreneurs’ plans to invest will dovetail nicely with consumer/savers inter-temporal plans to purchase the fruits of their investments. And we cannot explain how these plans are coordinated if they are. In essence, we have no theory of action in disequilibrium. It is possible to argue (“animal spirits,” etc.) that this implies that the market economy is unstable - Keynes's position. But, the Austrians would claim, it just isn't. There are cycles, fluctuations, errors, but the market economy is resilient - it exhibits powerful homeostatic properties. This is an historical interpretation and an empirical proposition - one that obviously cannot be "proved" any more than its opposite can. Austrians believe that the weight of the evidence strongly supports the proposition that, absent fiat money induced credit expansion, financial markets work pretty well to coordinate saving and spending decisions over time - even though no one has a detailed explanation of exactly how this occurs - and that monetary policy aimed at sustaining a boom, will cause an overshooting leading to a bust. It is not such a mystery. When the book value of assets exceeds by a huge margin any realistic projection of future revenue streams from consumer expenditure (especially in sectors that are “overinvested”) a brick wall is looming. Clearly, production has been distorted away from matching consumption. You don’t need a logically complete story of complete coordination to assert this.

Someone should collect the evidence of predictions from people using this framework. I would put some money on the bet that they would be quite accurate in predicting impending busts. The best current example we have is Peter Schiff's clear prediction of the current housing bust – something for which his suffered much derision at the time. But, this really did not surprise any of us Austrians. Nor the bust of boom before it. Nor will the coming bust of the current Treasury bubble. So, I am not sure why you think your logical point is fatal for the ABC theory. But, as it said, I will read the blogs.

Folks might also see this:

which is forthcoming in the Journal of Private Enterprise.

As far as I can tell, these blog postings are largely rehashs of issues raised in the Hayek/Keynes debates (plus the Cambridge capital controversies). We had a session on the Hayek/Keynes debates at APEE, which will be published in the Journal of Private Enterprise. Steve Horwitz made an outstanding contribution with his paper.

I personally don't find it fruitful to argue out fundamental differences in blog postings and comments. If there is a common framework and common knowledge of the literature on a blog, then there can be a useful exchange of views. If not, then not. So, I largely stick to CP and TM.

I am continually bemused and sometimes confused by folks who parachute into Austrian/free market sites to inform us that we're "wrong," where wrong is defined as we do not agree with the X (neoclassical,Neo-Keynesian post-Keynesian, whatever) school of economics. Do these critics think we haven't read or learned the tenets of these schools? We just don't happen to agree.

I never took a course in "Austrian economics." In my education, I actually read Keynes: The General Theory as an undergraduate and the Treatise in graduate school. I learned macro (including stock/flow analysis) from Clower and Leijonhufvud. While Karl Brunner was no longer at UCLA when I arrived, his influence was large. I found nothing in these postings on the determination of interest rates in markets that Brunner hadn't already written on. And, in my opinion, none of these authors hold a candle to Brunner in terms of intellectual rigor.

I am unimpressed.

I have to agree with Jerry.

I think we might want to stop with any hyphenated economics -- and just refer to economics. The people Matt cites largely see problems, but don't see how the price system actually works to solve the problems.

The frictions in the world are not blockages to good economics, but instead understood as part of the economic forces at work. As McCloskey would say in a slightly different context, the sort of economics Davidson is doing "cuts the story short". Let the market forces work and tell the true story about adjustment of plans through time.

But Matt -- we have been through this many times, these criticism are not only not new, but also not as deep as you (and they) think when you actually see how folks that engage in the economic analysis of the coordination of plans through time explain how the market works.

The art of criticism is not only found in raising problems, but in seriously understanding the solutions that are offered.


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