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The point isn't to publish as many papers as quickly as possible, but to advance truth in economic science. That requires some understanding of what is what in economics. The fact that so many individuals who claim to be "Austrian" or "libertarian" don't understand the slightest about what is going on in the profession or in the world of economic affairs, but feel free to pontificate regardless just reinforces the impression that the school of thought and its ideological warriors and policy wonks is little more than a collection of nut jobs.

If anybody is responsible for making Austrian Economics, it is not the ivory tower economists on this blog. Why do ivory tower guys hate it, when their ideas go more mainstream? Sure it is not understood or presented to the extent or liking of the "intellectuals", but the fact that ideas are spreading should be rejoiced!

I meant to say "making Austrian Economics Popular" not making Austrian Economics.

Hayek claims that what Fisher was "pinning down" -- i.e. putting into elegent math -- was an aspect of Bohm-Bawerk's conceptual work on interest and capital. See one of the appendix to Hayek's _TPTofC_.

Barkley writes:

"Yes, Menger and some others were fiddling with time before Bohm-Bawerk, with in my view Senior doing the best job, although neoclassicals would say that it was Irving Fisher who really pinned things down .."

Barley also writes:

"It should be kept in mind that Bohm-Bawerk's excursion into Ricardianism was in fact part of his attack on Marx, the first non-socialist to directly address his labor theory of value. A major motive for the APP was in fact to establish that capital was an independent source of value beyond labor .. "

This contextualization is a bit misleading -- I would suggest that Bohm-Bawerk "established" that capital was an independent source of value beyond labor independently of any reference to the APP. And the construction of the issue at hand itself is a bit misleading from the Menger / Bohm-Bawerk marginalist perspective.

The problem, Barkley, is that Hayek never wrote this:

"I would say that it is more scientific to argue that speculative bubbles might be able to arise without being fundamentally caused by overly easy monetary policy based on repeated laboratory experiments that show robustly that such bubbles can arise even with stringent financing conditions, although the bubbles will be bigger if there is looser financing, than it is to declare that bubbles can only arise due to overly easy monetary policy because that is what Mises and Hayek wrote .. "

Hayek in fact says the opposite. See Hayek's _Monetary Theory and the Trade Cycle_ or his _Prices, Interest and Investment_ for counter-examples to you claims about "what Hayek wrote".

This is another bogus "Hayek myt"h that won't die.

Barkley, make your contribution to a non-pathological history of economic thought conversation by taking the pledge right now to never repeat this myth again.


I am not blinded with hatred. I am rather an extremely benevolent guy. But, I have a zero tolerance for intellectual inconsistency. You spent a lot of time (literally weeks) and energy here defending your orthodox Misesian credentials and rejecting fiercely every objection that your unconventional position on ABCT was somehow heterodox, or "revisionist" within the Austrian economics. But, now you say that "It seems like Palmer is just assuming that the version of ABCT that came handed down from Mises and Hayek is the last word. Roger Garrison's work suggests it's not (as perhaps does my own)". So, you now warn Palmer to not waste his time with obsolete Mises's and Hayek's attempts, but to study more advanced and improved version of ABCT, developed by you, Garrison and others! Vow.

Further, you say that you never said that Mises and Hayek were fundamentalists. But, here is what you said:

"It’s ironic Tom that you would refer to (some? many? all?) Austrians as “religious” and concerned only with “studying” Austrian economics and then find yourself being, rightly in my view, criticized for an outdated, “fundamentalist” understanding of the theory. The point that all sides within AE are making in this debate is that Austrian economics is NOT a dead set of ideas from the 30s to be “studied” but rather a set that has evolved and been improved upon on the decades since."

Yes, maybe I was slightly wrong - you didn't say that Mises and Hayek were fundamentalists, but rather that they were wrong, and that fundamentalism amounts to taking them too seriously.

George, we agree about this:

"notwithstanding all the fancy arguments out there, logical validity isn't truth in the common understanding of that term, that is, as implying coherence with or correspondence with evidence. Deductive theory tells us how there can be such a thing as an ABC. It can't tell us whether there actually has ever been such, or whether the ATBC explains even an important part of any actual cycle. That requires empirics. And please don't try the silly trick of pretending that saying this means that I'm being a Popperian (sticks and stones...) or declaring that you have to run some goddam regression. It means, simply, that you have to do some real old fashioned history as in story-telling and see whether the theory is really useful for doing it."

I stand by my claim that Tom Palmer's crude "testing" criticisms of the "a priorists" were "basically correct". What the a priorist say is at least as half-true as what Palmer is claiming about "testing".

There are things that are true and things that are false in both positions -- and Palmer doesn't seem to understand why these positions are false or what truthful insights are contained within them, ergo his arguments against ABCT and the "a priorists" are junk in the context of this conversation.

I didn't mean to imply that George shared Palmer's views, only mean to point out that suggesting that Palmer's views were "essentially correct" wasn't helpful as part of this conversation.

Make that:

"I stand by my claim that it is simply not true that Tom Palmer's crude "testing" criticisms of the "a priorists" were "basically correct". What the a priorist say is at least as half-true as what Palmer is claiming about "testing"."

And even if we assume that you are right to believe that you and Garrison "improved" Mises and Hayek, it is not clear of what significance is that here. Palmer criticized a conventional Misesian/Hayekian assumption that is retained even in your "improved" version, namely that housing is an industry that is sensitive to interest rate changes, and that therefore housing bubble is consistent with ABCT (in both "unimproved" and "improved" versions)

George, I certainly didn't do this:

"Greg Ransom: Thanks for advising me to read Hayek."

George, I was mostly suggesting that _science_ can be really complicated. It's take a lot of time and work for even in the last 20 or 30 years to get a handle on this -- most picture of science popular among economists over the last 100 years assumes a simple picture of "science".

George writes:

"For Greg Ransom: .. I am also glad to learn that philosophy of science can get really complicated, and concede that this is something that the philosophers you mention have done an excellent job proving."

Well, Greg, your 11:08 admonition, "Read Hayek's works of 1941, 1937, 1929, etc. and you will see all of this various stuff" certainly _seems_ to have been directed at me, since it concludes a long statement to which a quote of my post is then attached. Anyway, I'm glad to be off the hook, 'cause I've got a long novel I'm trying to finish!


Fantastic post. One more example of why this is one of the best blogs around.

The comments have strayed OT a bit, but the question TGP raised about ABCT and the time structure of capital is important. In addition to housing, though, which has been discussed some already, we've also had a bubble in commercial real estate. Would the proliferation of chain restaurants, nail salons, high-end ice cream shops and the like represent a "lengthening" of the capital structure in the same way that housing does? Or would these investments, which are perhaps even more interest-rate sensitive than residential RE, represent some other phenomenon? How is Flo's Fancy Nail Salon a higher order good in the same way as an automobile factory?

I jump in with trepidation, as I only just learned of this controversy. I am reminded of the old adage that, if you find yourself in a hole, first stop digging. On the substance, housing is clearing an interest-sensitive, long-lived asset. I don't understand the contrast with the analysis of Anna Schwartz, because it has been entirely consistent with ABCT. I have quoted her on point any number of times (most recently in an article in the Intercollegiate Review). My major reservation about Tom Palmer's critique is that he wrapped himself in the mantle of science. I challenge the contrast of science and religion.

George, in the structure of informal argument this would be called a support statement. It's the equivalent of a reference or a reminder. I certainly didn't intend it as a personal admonition. My background assumption is that this offers support because you have read these and know then what I talking about and why it therefor has argumentative force. It hasnarfumentative force because I'm reminding the informed reader that it's true.

George writes:

"Well, Greg, your 11:08 admonition, "Read Hayek's works of 1941, 1937, 1929, etc. and you will see all of this various stuff" certainly _seems_ to have been directed at me, since it concludes a long statement to which a quote of my post is then attached."

George Selgin writes: "Deductive theory tells us how there can be such a thing as an ABC. It can't tell us whether there actually has ever been such, or whether the ATBC explains even an important part of any actual cycle. That requires empirics."

This makes total sense to me. I've tried to say something similar. Thanks.

George Selgin writes: "Deductive theory tells us how there can be such a thing as an ABC. It can't tell us whether there actually has ever been such, or whether the ATBC explains even an important part of any actual cycle. That requires empirics. And please don't try the silly trick of pretending that saying this means that I'm being a Popperian (sticks and stones...) or declaring that you have to run some goddam regression. It means, simply, that you have to do some real old fashioned history as in story-telling and see whether the theory is really useful for doing it."

This makes total sense to me.

Forgive the double (amended) post.


You are right. Mises and Hayek did not write what I said they did. I was imputing from comments from many people claiming that they are the sources of arguments that speculative bubbles arise from overly easy monetary policy. As it is, I went and checked. Much to my surprise, neither one of them has barely a word to say about speculative bubbles as such (I did find one vague google ref, which I could not pin down to an actual source, with Hayek (maybe) saying that in some situation "people hoard land for speculative purposes," but it might have been somebody else).

What one finds is the general theory of overly easy monetary policy leading to a credit expansion that later becomes a credit contraction, with the credit expansion leading to the well-known "malinvestment" due to the distortion of time patterns of real capital investment, with nothing about speculative bubbles in there at all as such. Indeed, as near as I can tell, the only time Mises discusses speculation is to praise it as necessarily stabilizing in forex markets along Friedman lines of the early 1950s (destabilizing speculators supposedly lose money, now known not to be always the case).

Now, there have been quite a few people making claims that ABCT explains the recent events, many at the MI, such as George Reisman and William French. However, all of this is imputing that the expansion of credit clearly must go excessively into housing, with little discussion of the role of expanding derivative markets or actual bubble dynamics tied to a bubble in the price of housing rather than an excessive expansion of housing construction.

So, I was wrong.

However, whichever of the Toms' interpretations is correct, it must be noted that while a collapse of housing construction after the end of the housing price bubble did indeed lead the recession (although well in advance of it, by a year or more), it is hard to argue that it was an overblown housing construction boom that led to the problems rather than the price bubble and the collapse of the related financial markets that was the source of our recent problems. I went and looked at data on housing starts from the National Association of Home Builders. Unsurprisingly, there is a close correlation between that and recessions. I note peak and trough years here, along with the number for the year the most recent housing bubble started (1998) (total housing starts)


From what I see, actual changes in housing construction were a minor player in the recent events, relatively speaking, especially given the magnitude of what has happened. So, starts in 1978 were almost as large as in 2005. The increase from the recession low of 1991 to the beginning of the bubble in 1998 was less than the increase after that to 2005, the period that all this wildly overly easy monetary policy was supposedly distorting everything so wildly in the actual pattern of capital investment towards long horizon housing construction.

In short, neither of the Toms is on top of it.

Oh, and Roger, while I mostly praised the Garrison piece, I note that it uses an essentially pre-1941 version of "duration" and "roundaboutness" without any of the caveats and nuances that both Hayek and he (Garrison) were fully aware of.

So, Greg, thanks for pushing me to getting at the bottom of this massive misrepresentation.


I think you misunderstand what Greg and Hayek are saying.

Some Austrian Economists claim that Hayek said that monetary expansion is the only possible cause of a bubble or the only possible cause of an episode of the business cycle. Hayek didn't say that and neither did Mises, as far as I know.

That doesn't mean though that Hayek thought that bubbles had nothing to do with his business cycle theory. Whatever the cause of a bubble its existence may distort the structure of production.

Hayek points out somewhere that even if the output of particular capital good does not increase. Even if all that happens is that their price increases, then there are still distorting effects.


And where does Hayek say that?

Oh, and I mis-wrote. The increase in housing starts from 1991 to 1998 exceeded that from 1998 to 2005.

Barkley, in _Monetary Theory and the Trade Cycle_ Hayek talks about speculation / leverage / optimism distortions of investment, profits, and the time stucture of production and consumption as the result of private financial institutions and investors, without the necessary participation of the central bank.

I've provide the refernce and sections of the text on just this topic at the THS blog and at the Mises blog.

In a 1937 book Hayek explains how cycle phenomena could be generated with no movement in the interest rate, and no central bank actions.


Specific quotations and page numbers would be useful, please. I am perfectly prepared to recognize at least Hayek as having recognized the possibility of destabilizing speculative bubbles occurring without being caused by overly easy monetary policy, even if large numbers of current ABCT advocates are running around declaring that the housing bubble was definitely caused by overly easy monetary policy, despite evidence to the contrary (again, I accept that the policy aggravated it; I simply question that it caused it).

'If you start by saying that the theory must be right because it is deduced from absolutely certain premises, you're not "doing science." Karl Popper had some valuable things to say on the matter...'

When you use discredited philosophy of science from 60 years ago while ignoring everything that has happened since, you are 'doing religion, not philosophy.'

"I'm going to take a pause from arguing about what libertarianism is or isn't and get back to being busy DOING libertarianism."

Stephan, oughtn't you add, "Pointlessly doing libertarianism," since you have oft stated that you see little chance of your ideas being put into practice?

Since I just finished tut-tutting the global warming activists for not speaking out when their friend Joe Romm behaved indecorously (, my inner hypocrisy alarm compels me to publicly say: Yes Mr. Palmer, I agree that it was a bit unseemly for Tom to email your boss. (I have only seen the snippets of the email that someone posted on your site.)

Now that I've made that concession, if you're still reading, I hope you can admit that you did a heck of a lot more than simply say, "I thought Tom's book was okay, but this other book was better." You know full well that if *that's* all you had said, we would all be doing something like advancing liberty right now (which is not nearly as fun as arguing with each other).

Barkley, here is textual evidence of Hayek's position that central bank action need not be the causal source of a boom - bust cycle. Read the whole of "lecture IV" for great detail of the process.

"Hayek's rejection of lose monetary policy by a central bank as the necessary and exclusive explanans of the Austrian trade cycle theory can be found in Lecture IV of Hayek's Monetary Theory and The Trade Cycle. Find there also Hayek's example of an artificial boom / inevitable bust cycle generated by private commercial banks rather than by a central bank ..

here's a brief section where Hayek rejects the identification of the Austrian theory with an explanation appealing exclusively to central bank policy:

The fact that [action by the Central Bank] is not an inherent necessity of the monetary starting point is however shown by the undoubtedly endogenous nature of the various older trade cycle theories, such as that of Wicksell. But since this suffers from other deficiencies, which have already been indicated, the question of whether the exogenous character of modern theories is or is not an inherent necessity of their nature remains an open one. It seems to me that this classification of monetary trade cycle theory depends exclusively on the fact that a single especially striking case is treated as the normal, while in fact it is quite unnecessary to adduce interference on the part of the banks in order to bring about a situation of alternating boom and crisis. By disregarding those divergencies between the natural and money rate of interest that arise automatically in the course of economic development, and by emphasizing those caused by an artificial lowering of the money rate, the monetary theory of the trade cycle deprives itself of one of its strongest arguments; namely, the fact that the process it describes must always recur under the existing credit organization, and that it thus represents a tendency inherent in the economic system, and is in the fullest sense of the word an endogenous theory.

It is an apparently unimportant difference in exposition that leads one to this view that the monetary theory can lay claim to an endogenous position. The situation in which the money rate of interest is below the natural rate need not, by any means, originate in a deliberate lowering of the rate of interest by the banks. The same effect can be obviously produced by an improvement in the expectations of profit or by a diminution in the rate of saving, which may drive the "natural rate" (at which the demand for and the supply of savings are equal) above its previous level; while the banks refrain from raising their rate of interest to a proportionate extent, but continue to lend at the previous rate, and thus enable a greater demand for loans to be satisfied than would be possible by the exclusive use of the available supply of savings. The decisive significance of the case quoted is not, in my view, due to the fact that it is probably the commonest in practice, but to the fact that it must inevitably recur under the existing credit organization.

I thank Greg for providing this quotation as well as some to me offlist. One of those provides a "sticky wages-prices-interest rates" model as well, which now would be labeled "New Keynesian," although Keynes himself tended not to stress that matter, despite what the textbooks say.

I remain waiting for somebody, anybody, to provide a quotation from either Mises or Hayek in which they recognize the existence of speculative price bubbles, especially ones not triggered by overly low interest rates. I do note that implicitly this issue does separate the Toms to some extent, given the greater emphasis by Palmer on the role of the housing price bubble in recent events.

In the Nov. 6, 2009 Wall Street Journal, there is a great piece, "The Man Who Predicted the Depression: Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy." I guess the WSJ has got religion!

The piece is at

I’ve been occupied by many other projects, but I’m in Hong Kong in-between meetings and have found a few minutes to devote to this odd kerfuffle, so let me clarify a few things.

1. A number of people seemed angered by my use of the word "religion." Let me clarify. By “religion,” I was not referring to the methods of investigation of Menger, Mises, Hayek, et al. That was certainly not my point. I used the term to refer to people whose method of investigation is to quote sacred texts as, well, sacred, without bothering to ask whether the claims quoted in fact can be checked, verified, disproven, compared with other claims as explanations of complex phenomena, etc., etc. Woods’s book qualifies. In comparison to Norberg’s (which also relies on insights from Mises and Hayek into booms induced by manipulated credit markets), it’s less serious and more an act of religion.

2. I’m not criticizing “ABCT” in general, either. I’m not committed one way or the other. I’m asking whether the theoretical account in Woods’s book (and not some other version in some other essay somewhere else) accounts for what happened. Woods himself sets a test on p. 82, after much insistence that “Austrian business cycle theory” explains what has happened in the present crisis: “If Austrian business cycle theory is correct, we should expect the most significant declines to be in the capital-intensive industries in the higher-order stages of production.” He applies that to the Japanese economy in the 1990s and cites a 2002 article by Ben Powell in the Quarterly Journal of Austrian Economics on “Explaining Japan’s Recession.” Note the words, “If Austrian business cycle theory is correct….” It suggests that if that is not what happens, Austrian business cycle theory is not correct. So, did we see “the most significant declines in the capital-intensive industries in the higher-order stages of production”? Is that what happened in the current case? Was the crisis a rippling out of the process he describes? Is it the case that the crisis was due to overinvestment in the “home construction” industry? (“Artificially low interest rates misdirected enormous resources into home construction.” P. 75) Was a collapse of the “home construction” industry the source of the problem, and not, perhaps, a financial house of cards built on a speculative bubble? Is it the case – and Woods cited it specifically on p. 82 as a test of “ABCT,” that “As the company works towards completing its projects [TGP: in this case, for Woods, it is “home construction”], it will find that the resources it needs, such as labor, materials, replacement parts – called by economists ‘complementary factors of production’ – are not available in sufficient quantities. The pool of real savings turns out to be smaller than entrepreneurs anticipated, and thus the complementary factors of production they need wind up being scarcer than they anticipated. The prices for these parts, labor, and other resources will therefore be higher than entrepreneurs expected, and business costs will rise.” Is that what happened? Did the home construction industry find that labor, parts, and other “complementary factors of production” rose higher than entrepreneurs expected, which caused them to stop building homes and lay off workers, which caused a crash? Yes, or no?

3. There has to be some way to test the account that Woods gives. There may be many ways to do so. Woods himself offers one in the case of the Japanese economy. But he doesn’t bother to apply it to the American. Why not?

4. My point about a theory being testable to be scientific is compatible with a variety of tests. But if it’s just asserted, or – and here the religion comes in – merely quoted from a text that is treated as if it were sacred, then the person doing the assertion is not engaged in a scientific enterprise. It’s a religious act, like quoting the Bible, the Qur’an, or the Book of Mormon. How could we tell which theoretical account best fitted with or explained the available evidence? Woods seems to insist on it in one case (the Japanese economy) and his formulation states quite clearly that if “the most significant declines” are not in “the capital-intensive industries in the higher-order stages of production,” then “ABCT” is not correct. (Note the syllogistic form: If A [Austrian business cycle theory is correct], then B [the most significant declines are in capital-intensive industries in the higher-order stages of production]. He states that it is the case that B. He doesn't go so far as to say that B being the case means that A is the case, but given his formulation, it would follow that if not B; then not A. Thus, by his rather exacting standard, if it is not the case that B, then “ABCT” is not correct, i.e., "ABCT" is false. That’s his standard, not mine. If the most significant declines were not in the "capital-intensive industries in the higher-order stages of production," then "ABCT" is false. So, is “ABCT” false by his own standards?

5. John Taylor offers a monetary-based account of the housing boom, but focuses, not on the decline in the “home construction” industry, but in the collapse of the financial system due to the excessive risk that was encouraged in the financial industry by government policy. “[R]isk in the balance sheets of financial institutions has been at the heart of the financial crisis from the beginning.” (p. 13, John Taylor, "Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis" [Stanford: Hoover Institution Press, 2009]) There’s no need to invoke any significant declines in the “capital-intensive industries in the higher-order stages of production” to tell that story. It may be compatible with some other variation of "ABCT" offered in some other book, but not with the one offered by Woods in the book I cited as inferior to another book that offers a better explanation.

6. People should not read books on economics or history religiously or feel invested in the necessary truths of theoretical accounts of complex phenomena. If Hayek gave an account that explained a crisis, then we’re better off for knowing it. But it doesn’t follow that all crises must be explained by that account. And if people calling themselves “Austrians” think it does, then they will consign themselves to an odd little corner of economics, and a shrinking one, at that, despite Woods’s odd description: “The Austrians, surely the fastest-growing school of economic thought in the world.” (For “the fastest growing school,” he notes they “have been neglected long enough.” Um, right.) Economists associated with that tradition have much to say to us, but when their ideas are promoted in a truly religious manner (i.e., merely quoted, without having their theories tested or compared to the evidence or to other theories) it does far more harm than good.

7. All that said, the Woods book has a number of good quotes from the popular media documenting the disastrous interventions into the mortgage markets. It’s “ok, but it does not compare well with the much more rigorous and financially sophisticated treatment offered by Norberg.” Norberg wrote a better book. (I should point out that Taylor did, as well, but it’s not as accessible or as general in its treatment of financial markets.)

8. So if people are mad that a book was compared to another book, so be it. They should think about what that says about them and their commitment to science. Emotional attachment may a very good thing when it's to friends, family, places, and the like. But not when it’s to a theory. And it does no service to that theory, or any of its refinements, when it's merely quoted as dogma, without being subject to any sort of tests, especially by someone who -- in another context -- subjected it to a very strong falsificationist criterion, but who seems unable or unwilling to do so in the case at hand.

9. I hope that I have clarified my comments about religion, which seem to have riled up a lot of people. I hope that maybe it will induce some of them to do the research and write the studies, articles, and books that improve our understanding of the financial crisis. We need that kind of work -- from scholars and scientists, not preachers...or even cartoonists.

Gene Callahan writes: "Stephan, oughtn't you add, "Pointlessly doing libertarianism," since you have oft stated that you see little chance of your ideas being put into practice?"

I was not aware I was alone in my pessimism about the prospects of liberty. Libertarians of the past no doubt had dorm room bull sessions and thought the achievement of libertopia was around the corner--yet when they died the income tax and government spending was higher than before. It seems very likely that will be our fate too.

If Gene Callahan knows something I don't about reasons for optimism, I've love to hear about it.

But I suspect Callahan is as realistic about the prospects of liberty as I and other libertarians are. So why he's singling me out to pick on for ... being a libertarian ... even though we are losing (which is not my fault) is a mystery. I don't pretend to be any expert on why we should, or even do, fight, even though it's in some ways futile. He might as well ask any other libertarian--or himself, if he is one. I suppose I fight for liberty because I enjoy it, and prefer to side with the civilized against its destroyers. Even if we can't "win." Again, why I should be criticized for fighting for liberty is a mystery.

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