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« Review of Austrian Economics 26 (3) 2013 is now available online | Main | Economath -- Some Historical Perspective »


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Pete, besides this Calvo paper that Adrian Ravier sent us, there are a few others that may go into your list:

1) Borio, C., & Disyatat, P. (2011). Global Imbalances and the Financial Crisis: Link or no Link? Basel: BIS Working Paper 2011.

2) Caballero, R. J. (2010). Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome. Journal of Economic Perspectives, 24(4), 85–102. doi:10.1257/jep.24.4.85

3) Diamond, D. W., & Rajan, R. G. (2009). Illiquidity and Interest Rate Policy. Cambridge: NBER Working Paper Series 15197

4) Leijonhufvud, A. (2009). Out of the Corridor: Keynes and the Crisis. Cambridge Journal of Economics, 33(4), 741–757. doi:10.1093/cje/bep022

5) Ohanian, L. E. (2010). The Economic Crisis from a Neoclassical Perspective. Journal of Economic Perspectives, 24(4), 45–66. doi:10.1257/jep.24.4.45

6) White, W. R. (2006). Is Price Stability Enough? Basel: Bis Working Paper 205.

These are the ones that are more explicit to the ABCT. There are others that offer a "similar" explanation to the ABCT but without mentioning it (neither for acknowledgement or differentiation):

1) Diamond, D. W., & Rajan, R. G. (2009). The Credit Crisis: Conjectures about Causes and Remedies. American Economic Review, 99(2), 606–610. doi:10.1257/aer.99.2.606

2) McKinnon, R. (2010). Rehabilitating the Unloved Dollar Standard. Asian-Pacific Economic Literature, 24(2), 1–18. doi:10.1111/j.1467-8411.2010.01258.x

3) Meltzer, A. H. (2009). Reflections on the Financial Crisis. Cato Journal, 29(1), 25–30.

4) Schwartz, A. J. (2009). Origins of the Financial Market Crisis of 2008. Cato Journal, 29(1), 19–23.

and of course:

5) Taylor, J. B. (2009). Getting Off Track. Stanford: Hoover Institute Press.

There's also recent work by A. Hoffmann and G. Schnabl on the ABCT international effects from the "center" of Europe to the Eastern European Countries.

We had a similar post to this one a couple of years ago at Punto de Vista Economico. You can practice your Spanish! (or use an online translator) here:

Prices/profits aren't really necessary though. I've struggled with this one for a while. It was the topic of my second comment on your blog...

Here was my second failed attempt...

And here's my third attempt...

I've finally managed to actually see a pragmatarian system with a 100% tax rate. No profit...but you can choose which organizations you give your money to. Resources would be efficiently allocated because consumers would still have the freedom to consider the alternative uses of their money.

Am I wrong?


I am not sure you have understood the fundamental problem as Hayek & Mises saw it. Which is how to decide the inputs of productive factors in the absence of price as a 'signal'.

Consumers & voters in a socialist community may know what they want. More tarpaulin for example. But that does not mean they know what it should be made of to achieve the lowest cost. Hemp jute, cotton, Flax, plastic & nylon ect, can all (if the consumer is indifferent)be substituted for each other in Tarp production. The decision to use one of these takes away from another use. If that other use is more valuable then tarps you have just wasted resources.

I don't see in your links how you have addressed this issue.

P.S. I don't know why I am signed in as 'D' my name is Nicholas. So that is not on purpose.

Here are a couple of more cites to add to the great list given by Nicolas Cachanosky.

Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2011. “Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons,” IMF Economic Review 59(2): 340-378.

Borio, C and W White (2003): “Whither monetary and financial stability? The implications of evolving policy regimes”, in Monetary policy and uncertainty: adapting to a changing economy, proceedings of a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, 28-30 August, pp 131–211.

Borio, Claudio and Philip Lowe. 2002. “Asset prices, financial and monetary stability: exploring the nexus,” BIS Working Paper No. 114.

White, William. 2013. “The Short and Long Term Effects of Ultra-Easy Monetary Policy,” manuscript. Downloaded 31 July 2013 from

We should try to leverage this moment to really bolster the place of ABCT in mainstream macro. It's up to us.

Nicholas, but here I am, allocating my time (a limited resource) in the absence of prices. Does this mean that I can't efficiently allocate my time? No...I can still efficiently allocate my time because I have the freedom to choose whichever use of my time will provide me with the most value.

This is applicable to any resource. If I use my time to produce hemp...then I wouldn't want my hemp to be wasted anymore than I'd want my time to be wasted. So, just like with my time, I would choose whichever use of my hemp would provide me with the most value. In other words, I'd give my hemp to whichever producers were doing the most with it.

If I did a good job allocating my hemp...then I'd receive positive feedback (money) which would increase my influence over how society's limited resource were used. If I did a poor job allocating hemp...if I gave it to producers who wasted it...then I wouldn't receive as much money and I'd lose influence over how society's limited resources were used.

So the market would still "guide and weed out"...but on the basis of opportunity cost and influence rather than prices and profit.

Mises and Hayek and others were basically arguing that markets work because your influence does not exceed your benefit to society. So as long as consumers can choose who they give their money to...then prices and profits are superfluous.

Free-market economists never realized this because they never imagined a system where taxpayers could choose where their taxes go. Once taxpayers can choose where their taxes go...then the public sector could determine the optimal supply of doctors, lawyers and milk as easily as it could determine the optimal supply of firemen, policemen and education.

Roger, you just added a few bullets at the top of my reading list. Good to have the list enlarged.

Thanks for the references.


I don't have time to really get into this with you. But if you read the economics literature, you will find out that prices embody opportunity costs, and if you read your own post -- the influence you are talking about due to control over resources are profits, and the penalty of that loss of resources are losses.

On your scheme, you should look at the literature on Quasi-Markets in the municipalities debates --- read the Ostroms work and the critiques. It will give you a good frame of reference.

Finally, I think you might also want to look at the literature on demand revealing processes in public goods provision. Tullock spoke about this quite a bit and there are various schemes some of which mimic yours. The problem is of course operationalizability.

I do think it is a mistake for you to characterize "free market economists" as a class who 'never realize' --- many of those economists have done a lot of work on this --- from the Italian public finance theorists right up to today and my colleague Richard Wagner.


Pete, thanks for sharing your thoughts!

In most literature (including this blog entry) I take "price" to be used in the narrow sense (literal price tags) rather than in the broad sense (opportunity cost). Given that it's untrue that literal price tags are required in order for resources to be efficiently preference is to replace "price" with "opportunity cost".

Doing so would really help broaden the scope of economics...which is essential for helping people to develop an economic point of view. For example, if somebody believes that literal price tags are required in order for resources to be efficiently allocated...then they won't readily grasp the value of allowing taxpayers to choose where their taxes go. Neither will they grasp that resources can be efficiently allocated in the non-profit sector.

Yes, you are right that I was too hasty in my critique of free-market economists!

Richard Wagner is pretty awesome...but here's something that he wrote with Giuseppe Eusepi that illustrates my issue...

"Without prices, it is impossible to engage in economic calculation on anything other than the small scale associated with barter. Prices are necessary to guide economic activity in the presence of scarcity. What holds for action within a market economy holds for action within the state economy as well."

Yes...but no. Opportunity costs, not literal price tags, are necessary to guide economic activity. I might just be trifling...but I don't think so.

I have fairly thoroughly reviewed the literature on demand revealing processes...

...and am pretty certain that this is where our line of attack should be. But it seems like few of the people who make free-market economics accessible are going this route. For example, a Google search of "demand revelation" or "preference revelation" within the website didn't produce any results. Maybe someday you could write an entry on the topic!

Just to be clear I am talking about the Calculation/Knowledge problem.

Take a look at the first two pages of David Ramsey Steele's article
Posing the Problem - The Impossibility of Economic Calculation Under Socialism
downloadable from the above URL. He has a very clear explanation of the idea.

It seems to me that by comparing direct appraisal of opportunity cost & value by an individual (your example was time) with the same kind of problem across an entire economy is missing the point.
Which is exactly that individual or firm can't know how their investment decisions will affect everyone else's plans without some guide.
Trading, creates ratio's of exchange embodying relative scarcities which are revealed in money prices. These prices act as a reference for making decisions on how to economise.

It is hard to tell what you mean to replace the guide mechanism of prices generated from market exchange with, as you were being rather vague as to the actual mechanism of this profitless and priceless 100% income tax system.

You say
“Yes...but no. Opportunity costs, not literal price tags, are necessary to guide economic activity”

Well that invites the question. How are opportunity costs made into an objective guide if not through a profit and loss system & 'price tags' people can check when making their entrepreneurial decisions?

Nicholas, thanks for linking me to the paper...I did read the first two pages.

Did you know that it takes 6 dates to equal one lemon? I'm not talking about exchange rates...I'm talking about lemonade. You can replace sugar with dates. That's innovation! But could we maximize societal value if the person in charge of a lemonade factory didn't know the prices of lemons, sugar, or dates? Once he had the idea to replace sugar with dates...then he would test it out on a small group of consumers. If the consumers preferred the taste...then he would try and get more dates. If he could get more dates then he would need less sugar. So the people in charge of the sugar factory would know that they had more sugar than they had before. Sugar would be freed up for more valuable uses.

Didn't we just increase the value society derives from its limited resources without knowing the prices of anything?

Hayek argued that prices embodied decentralized knowledge...but the person in charge of the date farm can't know more than he knows. He knows how many dates he's many dates are being demanded from him...and how much positive feedback (money) he's receiving. How can his date allocation decisions not incorporate his knowledge of the circumstances?

Socialism doesn't fail for lack of fails for lack of individual valuation. In the world I described, because of consumer sovereignty, you would have the freedom to give more positive feedback (money) to the innovative lemonade producer...and he could give more positive feedback (money) to the date farmer...and so on.

Although it's enjoyable to discuss, this is purely academic. There's really no need to prove that prices aren't necessary. We could just implement pragmatarianism using the current tax rate. If congress increased the tax rate...and taxpayers gave them more positive feedback (tax dollars)...then it would be because they were deriving more value from the public sector. The tax rate at which we ended up would represent the optimal division of labor between the public and private sectors.


“If he could get more dates then he would need less sugar. So the people in charge of the sugar factory would know that they had more sugar than they had before. Sugar would be freed up for more valuable uses”

This seems to me to be begging the question again. Just because they can 'get' more dates does not necessarily mean that they should.

I am afraid that I still don't have enough detail to piece together what you are talking about. It would be good if you could set it out systematically. What you have written is scattered around in comments & on you blog.

From your blog it seems that the idea is that people are taxed at 100% & the individual decides where that compulsory levy goes through 'donating'. If this is the case how will they have any money left to buy anything at all? Do tax donated firms instead give stuff away for free?

Nicholas, whether Mr. Lemonade should have more dates depends on how well he is using them. How well he is using them would be determined by consumers and date farmers. Just like how much time I give you depends on how well you're spending my time. Why would I choose to give you my time if I perceived that you were wasting it? The fact that I continue to give you this amount of my time is an indication that I derive more value from this particular use of my time than I would from the alternative uses of my time.

So should I give you more of my time? Sure, just write a book about tax choice. I'll give you more time than I give my gf! Deal or no deal?

How many different ways can your time be used? Which uses are the most valuable? How many different ways can dates by used? Which uses are the most valuable?

"Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth." - Ludwig M. Lachmann,

If Mr. Date has great foresight...then the uses to which he allocates his dates will yield significant amounts of positive feedback (money).

Socialism doesn't fail because there aren't any fails because, as Bastiat noted, it destroys individual foresight.

Regarding what I'm talking about. Yeah, it's a little confusing because I'm talking about two different, but closely related, things...pragma-socialism and pragmatarianism. Pragma-socialism is pragmatarianism with a 100% tax rate. You gotta spend all your money in the public sector...but every organization is in the public sector. Giving money to your favorite band would be paying taxes.

Uh, but I'm not proposing pragma-socialism. I'm just using to try and illustrate a world without literal price tags. What I propose is pragmatarianism...which could lead us to pragma-socialism or anarcho-capitalism or anywhere in between. Where the tax rate would end up would indicate just how necessary/valuable prices are.

Not sure if this counts as setting pragmatarianism out systematically...but you motivated me to finally write out a FAQ...


“pragma-socialism” and your claims about it not having profits or prices yet still achieving rational economic calculation is what I am specifically interested in(even if you're not personally in favour). Ether we are talking at cross purposes and there actually are market prices in PS. Or you are wrong. Or you are a genius who has refuted Hayek & Mises where no one else has.

I just realised the key part of this

“Did you know that it takes 6 dates to equal one lemon? I'm not talking about exchange rates...I'm talking about lemonade. You can replace sugar with dates. That's innovation! But could we maximize societal value if the person in charge of a lemonade factory didn't know the prices of lemons, sugar, or dates? Once he had the idea to replace sugar with dates...then he would test it out on a small group of consumers. If the consumers preferred the taste...then he would try and get more dates. If he could get more dates then he would need less sugar. So the people in charge of the sugar factory would know that they had more sugar than they had before. Sugar would be freed up for more valuable uses”

that I missed was this - “If the consumers preferred the taste”. Far more interesting is when the consumers are indifferent to dates or sugar. Such as with my Tarp example & Steele's example. Faced with the decision to use one or the other which should he choose? For a lemonade entrepreneur who came up with the idea of using dates one of the key things he would consider is how much money he would have to pay compared with the suger he is using already. Is it worth him taking the risk? If dates are cheaper to use overall then it probably is and he has made himself and society better off by releasing higher valued sugar for other uses.

How would the same man in pragma-socialism make that decision? What would his thought process be? I am a lemonade producer and I will decide what sweetener to use by.....

Your answer to this question before has been that the consumers & other firms in the supply chain would regulate this. That “If Mr. Date has great foresight...then the uses to which he allocates his dates will yield significant amounts of positive feedback (money)”

But why should the date producer have any more idea then the lemonade producer what the relative scarcity of dates and sugar is across the entire economy? If Lemonade producer asked the consumers they no doubt would like lower lemonade prices. But the Lemon man would still be left with the decision as to which input would achieve that.

P.S I am fully on board with the subjectivism of the Lachmann quote.

I call shenanigans on consumers being indifferent! Go buy some dates, remove the seeds, stick them in a blender with lemon juice and ice. You won't be indifferent once you try it! Heh.

If I was Mr. Lemonade, that's what I'd tell Mr. Date. Mr. Date would try it and love it and have his friends and family try it as well. Of course they would love it too. So it doesn't take much foresight to see that this is a valuable use of dates. In other words, Mr. Date would not doubt the business model. And he would invest a percentage of his crop in my idea.

When it was wildly successful...and consumers started giving me far more positive feedback (money) than they gave to my competitors...then I would pass a good portion of that positive feedback (money) onto Mr. Date. As a result, he'd plant more date trees to meet the increased demand for dates.

Of course, unfortunately my competitors would soon enough follow my lead. And this would increase the demand for dates even more...and cut into my revenue.

Just like McDonald's, Burger King, etc started offering fruit smoothies after Jamba Juice definitively proved that there is a sizable demand for fruit smoothies. I wonder how much it's cut into their profits. I also wonder how many people initially doubted the Jamba Juice business model.

In both systems, there would be quite a bit of homework required. And in both systems, there's no guarantee that there's going to be 100,000 dates available. Knowing the price of dates doesn't change that. Would knowing the price of dates prevent Mr. Lemonade from taking unnecessary risks? Let's say Mr. Date did doubt the business model...and so did Mr. Date2 and Mr. Date3...then would Mr. Lemonade start his own date farm?

On one hand you have to price your dates to maximize your revenue...and on the other hand you have to allocate your dates to maximize your revenue. But when you try and figure out whether to give any dates to Mr.'re gonna consider the opportunity cost. As such, resources would be efficiently allocated. Therefore, prices aren't necessary to efficiently allocate resources.

We can switch the topic from dates (the fruit) to dates (the activity) and come to the same conclusion. Even if you could date Mr. Date at absolutely no cost, there would still be an opportunity cost. In a free-market you wouldn't have to date him if he didn't match your preferences. But in a planned economy we encounter the forced-rider problem. It doesn't matter whether or not you doubt the business still have to contribute. Pacifists have to pay for war regardless of their preferences.

So I think it's a matter of really missing the point to say that command/planned economies fail because there aren't any prices. I get the feeling that many free-market economists fall into this trap...given the lack of interest/enthusiasm for pragmatarianism.

If you get a chance you should read the passage by Derrida that I shared on this blog entry...Opportunity Cost Passages. That's a heck of a lot of economic calculation...all of which occurs in the complete absence of prices. It's just important that people have the freedom to decide for themselves what they value most...and allocate their resources accordingly.


“I call shenanigans on consumers being indifferent! Go buy some dates, remove the seeds, stick them in a blender with lemon juice and ice. You won't be indifferent once you try it! Heh”

Well there is a point for the consumers being indifferent. It simplifies the variables so we can focus on the problem of economic calculation. (It really does not matter what goods we are using as examples)

Whatever I write bellow the line. This is the question that I care most about being answered
'I am a pragma-socialism lemonade producer and I will decide what sweetener to use by..... '

On Derrida's quote & “That's a heck of a lot of economic calculation...all of which occurs in the complete absence of prices” - Have you not read Mises original 1922 article Economic Calculation in the Socialist Commonwealth or the corresponding Chapter of Socialism: An Economic and Sociological Analysis?

“Every man who, in the course of economic life, takes a choice between the satisfaction of one need as against another, eo ipso makes a judgement of value. Such judgements of value at once include only the very satisfaction of the need itself; and from this they reflect back upon the goods of a lower, and then further upon goods of a higher order. As a rule, the man who knows his own mind is in a position to value goods of a lower order. Under simple conditions it is also possible for him without much ado to form some judgement of the significance to him of goods of a higher order. But where the state of affairs is more involved and their interconnections not so easily discernible, subtler means must be employed to accomplish a correct valuation of the means of production. It would not be difficult for a farmer in economic isolation to come by a distinction between the expansion of pasture-farming and the development of activity in the hunting field. In such a case the processes of production involved are relatively short and the expense and income entailed can be easily gauged. But it is quite a different matter when the choice lies between the utilization of a water-course for the manufacture of electricity or the extension of a coal mine or the drawing up of plans for the better employment of the energies latent in raw coal. Here the roundabout processes of production are many and each is very lengthy; here the conditions necessary for the success of the enterprises which are to be initiated are diverse, so that one cannot apply merely vague valuations, but requires rather more exact estimates and some judgement of the economic issues actually involved”

Opportunity cost is omnipresent in life. While economic calculation is necessary under conditions of extensive complexity caused by the division of labour and accompanying division of knowledge.

“But in a planned economy we encounter the forced-rider problem” I don't know why you bring this up. You are not talking about a planned economy, & so I am not arguing against a planned economy. You are arguing for the effectiveness of a spontaneous self ordering system without the features of profit loss and prices that are key to actual markets. While it does not sound to me like it can self organise. The economic calculation problem is not just about Central planning.

Also the forced-rider problem has nothing to do with the economic calculation problem ether. It applies even if we don't care about the people and their preferences but only care about the preferences of the central planning board.

I can't remember where I read it, but somewhere Mises addressed the issue of why economists abandoned the monetary theory of business cycles. He wrote something to the effect that most economists were enamored with socialism and the monetary theory ruled out socialist solutions to crises.

Marx fabricated that idea that crises were a natural part of capitalism. Economists wanted to maintain Marx's theme. They wanted to find the problem within the system (endogenous). The monetary theory ruined it for them for the saw money as outside the system (exogenous).

If crises happen because businessmen act irrationally (Keynes) or consumers irrationally hold more cash (monetarism), then we have a rationale for the intellectuals to step in and rescue the irrational masses from themselves.

BTW, I have started a blog that applies the ABCT to investing over at

The paper is very interesting in the way it tries to bridge the gulf between equilibrium analysis and Austrian dynamic analysis. I have one quibble: he refers to the bank runs as random shocks or accidents:

“Actually, there may be penetration phases that do not end up in crisis because investors stop well before the probability of a liquidity crunch becomes critical or the "run" random shock does not materialize….These are accidents that can happen in the context of perfectly well‐run financial machinery under imperfect financial regulation.” P17.

The run on investment banks happened because the value of the MBSs collapsed according to Gorton.
It wasn’t an accident. The value of MBSs collapsed because the real estate that provided the collateral for the home loans that made up the MBSs collapsed. The value of real estate collapsed because of overbuilding in the industry due to low interest rates set by the Fed. It’s the old ABCT.

Had the Fed raised rates earlier, fewer people would have borrowed to buy houses. Fewer houses sold would have caused fewer mortgages to be transformed into MBSs. There is nothing accidental about it.

But the Fed was obsessed with price inflation and that was pretty low before the crisis. As Calvo wrote, the financial machinery seemed to be working well. Of course, the Great D occurred after a period of low inflation, too. Hayek shows in “Prices, Interest and Investment” how the crisis will happen even if the Fed never raises interest rates and even if price inflation is low. It’s all about profits.

Roger, I don't think monetarism hold that consumers are "irrationally" holding on to cash. They think that nominal prices for labor are "sticky" downward. Propensity to consume can remain the same and the recession still fixed by reducing unemployment & output through reduction of real (but not nominal) wages.

I pointed out this difference between Mises and Hayek that Calvo flags in his paper over 15 years ago in the Q & A portions of a Tyler Cowen paper on the ABCT, a paper in which Tyler took a version of the Mises theory to _be_ the Austrian Business Cycle theory.

It looks like Tyler has just now banned me from Marginal Revolution for recounting this fact.

Who knows, maybe the comments section is just down.

D, I guess it depends on the monetarist you read. The ones I have read assume that the recession begins when people suddenly demand more cash and they're not willing to consider why people might do that.

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