WEBVTT NOTE The Austrian Theory in Perspective 1 00:00:00.000 --> 00:00:05.280 The Austrian Theory in Perspective by Roger W. Garrison 2 00:00:06.240 --> 00:00:13.360 The four essays in this volume, each written by a major figure in the Austrian School of Economics, 3 00:00:14.000 --> 00:00:23.520 set out and apply a distinctive theory of the business cycle. The span of years 1932 to 1970, 4 00:00:23.520 --> 00:00:31.440 over which they appeared saw a dramatic waxing and then waning of the prominence both inside 5 00:00:31.440 --> 00:00:40.640 and outside the economics profession of the Austrian theory. Gottfried Haberler wrote in his 1932 essay 6 00:00:40.640 --> 00:00:47.120 that the theory is not so well known in this country as it deserves to be. Although Ludwig 7 00:00:47.120 --> 00:01:08.120 When Ludwig von Mises offered no assessment in this regard in his essay, he remarked in 1943 about the effect of the theory's general acceptance on the actual course of the cycle, anticipating a key insight in the modern literature on rational expectations. 8 00:01:08.120 --> 00:01:28.120 Then, in 1969, Murray and Rothbard could write without serious overstatement that a correct theory of depressions and of the business cycle would be a good example of this. 9 00:01:28.120 --> 00:01:45.120 Then, in 1969, Murray and Rothbard could write without serious overstatement that a correct theory of depressions and of the business cycle does exist even though it is universally neglected in present-day economics. 10 00:01:45.120 --> 00:01:55.120 What happened over the span of nearly 40 years to account for the rise and fall of this theory of boom and bust? 11 00:01:55.120 --> 00:02:00.260 The simple answer, of course, is the Keynesian Revolution. 12 00:02:00.260 --> 00:02:06.920 John Maynard Keynes's general theory of employment, interest, and money, which made its appearance 13 00:02:06.920 --> 00:02:15.960 in 1936, produced a major change in the way that economists deal with macroeconomic issues. 14 00:02:15.960 --> 00:02:21.880 A close look at some pre-Keynesian ideas can show why the Austrian theory was so easily 15 00:02:21.880 --> 00:02:26.480 lost in the aftermath of the Keynesian Revolution. 16 00:02:26.480 --> 00:02:32.260 A brief survey of the alternatives offered by modern macroeconomics will show why there 17 00:02:32.260 --> 00:02:37.580 is a newfound interest in this bold Austrian theory. 18 00:02:37.580 --> 00:02:44.060 First introduced by Mises in his Theory of Money and Credit 1912, the theory was originally 19 00:02:44.060 --> 00:02:50.680 billed as the Circulation Credit Theory rather than as a uniquely Austrian theory. 20 00:02:50.680 --> 00:02:56.000 Mises was very much aware of its multinational roots. The notion that the market process 21 00:02:56.000 --> 00:03:01.560 can be systematically affected by a divergence between the bank rate of interest and the 22 00:03:01.560 --> 00:03:07.800 natural rate came from Swedish economist Knut Miksel. The understanding that the process 23 00:03:07.800 --> 00:03:14.140 so affected would have a self-reversing quality to it, Mises used the term counter-movements 24 00:03:14.140 --> 00:03:19.840 in his earliest exposition, came from the British Currency School, whose analysis featured 25 00:03:19.840 --> 00:03:22.160 International Gold Flows. 26 00:03:22.160 --> 00:03:30.160 The uniquely Austrian element in Mises's formulation is the capital theory introduced by Carl Menger 27 00:03:30.160 --> 00:03:33.600 and developed by Eugen von Boehm-Bawerk. 28 00:03:33.600 --> 00:03:40.640 Mises showed that an artificially low rate of interest maintained by credit expansion 29 00:03:40.640 --> 00:03:48.400 misallocates capital, making the production process too time-consuming in relation to 30 00:03:48.400 --> 00:03:51.880 to the temporal pattern of consumer demand. 31 00:03:51.880 --> 00:03:58.260 As time eventually reveals the discrepancy, markets for both capital goods and consumer 32 00:03:58.260 --> 00:04:03.640 goods react to undo the misallocation. 33 00:04:03.640 --> 00:04:12.560 The initial misallocation and eventual reallocation constitute the microeconomic foundations that 34 00:04:12.560 --> 00:04:18.120 underlie the observed macroeconomic phenomenon of boom and bust. 35 00:04:18.120 --> 00:04:25.000 Mises's theory was superior to its Swedish forerunner in that Vicksel was concerned almost 36 00:04:25.000 --> 00:04:31.480 exclusively with the effect of credit expansion on the general level of prices. 37 00:04:31.480 --> 00:04:36.780 It was superior to its British forerunner in that the currency school's theory applied 38 00:04:36.780 --> 00:04:46.060 only when monetary expansion in one country outpaced that of its trading partners. Mises's 39 00:04:46.060 --> 00:04:54.540 theory was applicable even to a closed economy and to a world economy in which all countries 40 00:04:54.540 --> 00:05:02.400 are experiencing a credit expansion. The theory took on a more predominantly Austrian character 41 00:05:02.400 --> 00:05:10.880 In the hands of F. A. Hayek, in the late 1920s and early 1930s, Hayek gave emphasis to the 42 00:05:10.880 --> 00:05:18.520 Austrian vision of capital that underlies the business cycle theory by introducing a simple 43 00:05:18.520 --> 00:05:25.840 graphical representation of the structure of production. He used right triangles that 44 00:05:25.840 --> 00:05:32.520 The Change in Shape to Illustrate a Change in the Economy's Capital Structure 45 00:05:32.520 --> 00:05:37.960 Hayek focused the analysis clearly on the relationship between the roundaboutness of 46 00:05:37.960 --> 00:05:43.920 the production process and the value of the corresponding output. 47 00:05:43.920 --> 00:05:52.200 The Hayekian triangles keep track of both time and money as goods in process make their 48 00:05:52.200 --> 00:05:57.300 their way through the temporally sequenced stages of production. 49 00:05:57.300 --> 00:06:04.840 His notion of a linear production process is highly abstract and overly simple in the 50 00:06:04.840 --> 00:06:12.280 light of a fuller accounting of the fixed and circulating capital that actually characterizes 51 00:06:12.280 --> 00:06:14.760 a capital-using economy. 52 00:06:14.760 --> 00:06:23.280 However, these triangles feature an essential but often neglected dimension, the time dimension, 53 00:06:23.280 --> 00:06:31.260 in the account of boom and bust. Alternative theories, in which consumption and investment 54 00:06:31.260 --> 00:06:38.080 appear as two coexisting aggregates, can be seen as even more simplistic, to the point 55 00:06:38.080 --> 00:06:52.100 Hopperler concludes his essay with an expression of concern about the complexity of the Austrian 56 00:06:52.100 --> 00:07:00.440 theory, which he saw as a serious disadvantage, but the complexity in his judgment is inherent 57 00:07:00.440 --> 00:07:07.220 in the subject matter, and hence is not a fault of the theory. Complexity is evident 58 00:07:07.220 --> 00:07:15.740 in the two early essays, 1936 and 1932, in their organization and style of argument. 59 00:07:15.740 --> 00:07:22.140 Both Mises and Haberler defend the theory against its critics and deal with various 60 00:07:22.140 --> 00:07:29.020 misunderstandings. Mises, for instance, identifies Irving Fisher's inflation premium, which attaches 61 00:07:29.020 --> 00:07:35.340 itself to the rate of interest as prices in general rise, only to say that this is not 62 00:07:35.340 --> 00:07:43.260 what he is talking about. He is discussing instead another aspect of interest rate dynamics. 63 00:07:43.260 --> 00:07:51.360 The real rate of interest rises at the end of the boom to reflect the increasing scarcity 64 00:07:51.360 --> 00:07:57.740 of circulating capital after excessive amounts of capital have been committed to the early 65 00:07:57.740 --> 00:08:00.900 stages of production processes. 66 00:08:00.900 --> 00:08:06.700 Haberler takes great pains to refocus the reader's attention away from the general 67 00:08:06.700 --> 00:08:13.580 price level and toward the relative prices that govern the vertical structure of production. 68 00:08:13.580 --> 00:08:19.380 He distinguishes between absolute deflation and relative deflation, and between primary 69 00:08:19.380 --> 00:08:26.020 and fundamental phenomena that characterize the downturn, and secondary and accidental 70 00:08:26.020 --> 00:08:29.700 phenomena that may also be observed. 71 00:08:29.700 --> 00:08:36.600 All these complexities plus still others involving such notions as the natural rate of interest 72 00:08:36.600 --> 00:08:42.760 and the corresponding degree of roundaboutness of the production process are unavoidable in 73 00:08:42.760 --> 00:08:47.920 a theory that features an inter-temporal capital structure. 74 00:08:47.920 --> 00:08:55.240 The theoretical richness that stems from the attention to capital has as its negative counterpart 75 00:08:55.240 --> 00:08:59.680 The Expositional Difficulties and Scope for Misunderstanding 76 00:08:59.680 --> 00:09:05.060 Keynes offered the profession relief from all this by articulating, though cryptically, 77 00:09:05.060 --> 00:09:08.080 a capital-free macroeconomics. 78 00:09:08.080 --> 00:09:12.300 As Rothbard's discussion implies, all the thorny issues of capital theory were simply 79 00:09:12.300 --> 00:09:13.900 swept aside. 80 00:09:13.900 --> 00:09:20.620 An alternative theory that featured the playoff between incomes and expenditures left little 81 00:09:20.620 --> 00:09:24.360 or no room for a capital structure. 82 00:09:24.360 --> 00:09:29.760 Investment was given special treatment not because of its link to future consumption, 83 00:09:29.760 --> 00:09:35.740 but because spending on investment goods is particularly unstable. 84 00:09:35.740 --> 00:09:41.320 Uncertainties, which are perceived to be a deep-seated feature of market economies, dominate 85 00:09:41.320 --> 00:09:47.260 decision-making in the business community and give play to psychological explanations 86 00:09:47.260 --> 00:09:52.440 of prosperity and depression, and the notion that depression may be attributable to pessimism 87 00:09:52.440 --> 00:09:59.660 on the part of the business community, suggests a need for central direction and policy activism. 88 00:09:59.660 --> 00:10:07.560 Prosperity seems to depend upon strong and optimistic leadership in the political arena. 89 00:10:07.560 --> 00:10:12.860 Relief from the complexities of capital theory together with policy implications that were 90 00:10:12.860 --> 00:10:19.800 exceedingly attractive to elected officials gave Keynesianism an advantage over Austrianism. 91 00:10:19.800 --> 00:10:26.200 An easy-to-follow recipe for managing the macroeconomy won out over a difficult-to-follow 92 00:10:26.200 --> 00:10:33.600 theory that explains why such management is counterproductive. Tellingly, the later two 93 00:10:33.600 --> 00:10:43.880 essays, 1969 and 1970, are as much about Keynesianism as about Austrianism. Rothbard and Hayek are 94 00:10:43.880 --> 00:10:50.200 are trying anew to call attention to a theory that had been buried for decades under the 95 00:10:50.200 --> 00:10:55.800 Keynesian avalanche. Rothbard deals with the Phillips curve, which purports to offer a 96 00:10:55.800 --> 00:11:02.240 choice to political leaders between inflation and unemployment. Hayek deals with the wage-price 97 00:11:02.240 --> 00:11:08.000 spiral, which had captured the attention of journalists and textbook authors for much 98 00:11:08.000 --> 00:11:14.400 of the postwar era. The need for dealing critically with Keynesianism and with monetarism, while 99 00:11:14.400 --> 00:11:20.400 at the same time reintroducing the key considerations from Capital Theory, meant that the Austrian 100 00:11:20.400 --> 00:11:27.880 Theory of the Business Cycle was an even harder sell in the 1970s than it had been a half 101 00:11:27.880 --> 00:11:33.880 century earlier. The offering of these four separate and distinct essays on the Austrian 102 00:11:33.880 --> 00:11:39.560 The time theory carries the message that there is no single canonical version of the theory. 103 00:11:39.560 --> 00:11:44.120 Our understanding of boom and bust is not based upon some path story to be told once 104 00:11:44.120 --> 00:11:45.120 and for all time. 105 00:11:45.120 --> 00:11:48.520 Rather, the theory allows for variations on a theme. 106 00:11:48.520 --> 00:11:53.880 The market works, it tailors production decisions to consumption preferences, but production 107 00:11:53.880 --> 00:11:58.760 takes time, and as the economy becomes more capital intensive, the time element takes 108 00:11:58.760 --> 00:12:00.760 on greater significance. 109 00:12:00.760 --> 00:12:05.440 The role of the interest rate in allocating resources over time becomes an increasingly 110 00:12:05.440 --> 00:12:06.760 critical one. 111 00:12:06.760 --> 00:12:11.640 Still, if the interest rate is right, that is, if the interplay between lenders and borrowers 112 00:12:11.640 --> 00:12:15.720 is allowed to establish the natural rate, then the market works right. 113 00:12:15.720 --> 00:12:20.480 However, if the interest rate is wrong, possibly because of central bank policies aimed at 114 00:12:20.480 --> 00:12:24.040 growing the economy, then the market goes wrong. 115 00:12:24.040 --> 00:12:28.200 The particulars of just how it goes wrong, just when the misallocations are eventually 116 00:12:28.200 --> 00:12:39.920 are all dependent on the underlying institutional arrangements and on the particular actions 117 00:12:39.920 --> 00:12:44.740 of policymakers and reactions of market participants. 118 00:12:44.740 --> 00:12:51.480 The essays leave much scope for solving puzzles, for refining both theory and exposition, and 119 00:12:51.480 --> 00:12:56.160 for applying the theory in different institutional and political environments. 120 00:12:56.160 --> 00:13:02.440 One enduring puzzle emerges from the writings of several economists, including Haberler, 121 00:13:02.440 --> 00:13:07.400 who once embraced the theory enthusiastically, but subsequently rejected it. 122 00:13:07.400 --> 00:13:13.600 The key question, underlying the recantations, is easily stated, can the intertemporal misallocation 123 00:13:13.600 --> 00:13:19.120 of capital that occurs during the boom account for the length and depth of the Depression? 124 00:13:19.120 --> 00:13:23.840 Haberler provides one of the best answers to this question, one that is most favourable 125 00:13:23.840 --> 00:13:29.880 to the Austrian Theory in his 1932 essay. The maladjustment of the vertical structure 126 00:13:29.880 --> 00:13:35.760 of production, to use Haberler's own term, does not by itself account for the length 127 00:13:35.760 --> 00:13:40.240 and depth of the Depression. Rather, this policy-induced change in the intertemporal 128 00:13:40.240 --> 00:13:46.720 structure of capital is the basis for the claim that a crisis and downturn are inevitable. 129 00:13:46.720 --> 00:13:51.600 The reallocation of resources that follows the downturn, which largely mirrors both qualitatively 130 00:13:51.600 --> 00:14:21.440 The same policymakers who orchestrated the artificial boom may well behave ineptly when 131 00:14:21.440 --> 00:14:27.680 When they see that the ultimate consequence of their policy is a bust, their failure to 132 00:14:27.680 --> 00:14:33.080 stem the monetary contraction together with interventions by the legislature that prop 133 00:14:33.080 --> 00:14:39.680 up prices and wages and strengthen trade barriers will make a bad situation worse. 134 00:14:39.680 --> 00:14:45.760 All such complications, which play themselves out as a self-aggravating contraction, are 135 00:14:45.760 --> 00:14:50.280 correctly identified by Haberler as secondary phenomena. 136 00:14:50.280 --> 00:14:56.680 This term is not employed to suggest that these aspects of the depression are negligible, 137 00:14:56.680 --> 00:14:59.160 or second order in importance. 138 00:14:59.160 --> 00:15:04.960 It may well be, Haberler explains, that the secondary wave of depression, which is induced 139 00:15:04.960 --> 00:15:11.560 by the more fundamental maladjustment, will grow to an overwhelming importance. 140 00:15:11.560 --> 00:15:17.320 Though possibly overwhelming, the effects of the complications are still secondary in 141 00:15:17.320 --> 00:15:21.100 in the sense of temporal and causal ordering. 142 00:15:21.100 --> 00:15:29.600 The puzzle in all this emerges when we read Haberler's 1976 recantation of the Austrian 143 00:15:29.600 --> 00:15:36.880 Theory, which echoed Lionel Robbins's heartfelt recantation of a few years earlier. 144 00:15:36.880 --> 00:15:44.320 Mises refers to Robbins's 1934 book, The Great Depression, as the best analysis of 145 00:15:44.320 --> 00:15:46.440 the actual crisis. 146 00:15:46.440 --> 00:15:52.240 In 1971, Robbins wrote in his autobiography that this is a book which he would willingly 147 00:15:52.240 --> 00:15:59.800 see forgotten. Drawing on Robbins' recantation, Habler offers the opinion that the real maladjustments, 148 00:15:59.800 --> 00:16:05.480 whatever their nature, were completely swamped by vast deflationary forces, but rather than 149 00:16:05.480 --> 00:16:10.040 suggest as he had earlier that these forces could easily have been induced by the more 150 00:16:10.040 --> 00:16:16.200 for Fundamental Maladjustments, he simply attributes them to institutional weaknesses 151 00:16:16.200 --> 00:16:18.120 and policy mistakes. 152 00:16:18.120 --> 00:16:26.000 The astute reader will see Haberler's 1932 discussion of secondary phenomena as an insightful 153 00:16:26.000 --> 00:16:32.720 and hard-hitting critique of the 1976 Haberler, and would see a similar relationship between 154 00:16:32.720 --> 00:16:38.560 the 1934 Robbins and the 1971 Robbins. 155 00:16:38.560 --> 00:16:46.080 In 1932, Haberler alluded to the economic earthquakes that Western countries had experienced. 156 00:16:46.080 --> 00:16:50.920 He might have put the earthquake metaphor to further use in accounting for the relationship 157 00:16:50.920 --> 00:16:54.080 between primary and secondary issues. 158 00:16:54.080 --> 00:16:59.740 During the 1906 earthquake in San Francisco, for instance, fires broke out and caused much 159 00:16:59.740 --> 00:17:04.140 more destruction than had been caused by the actual quaking of the earth. 160 00:17:04.140 --> 00:17:09.560 Even so, the fire was a secondary phenomenon, the quake was the primary phenomenon. 161 00:17:09.560 --> 00:17:13.700 The fact that the length and depth of the Great Depression are to be accounted for largely 162 00:17:13.700 --> 00:17:18.540 in terms of secondary phenomena, then, does not weigh against our understanding that the 163 00:17:18.540 --> 00:17:23.220 primary phenomenon was the quaking of the capital structure. 164 00:17:23.220 --> 00:17:29.300 What accounts, then, for the recantation of these Austrian theorists and of several others, 165 00:17:29.300 --> 00:17:34.020 including John R. Hicks, Nicholas Caldor, and Abba P. Lerner? 166 00:17:34.020 --> 00:17:37.440 This puzzle remains to be solved. 167 00:17:37.440 --> 00:17:43.100 Expositional difficulties derive largely from the fact that the capital-based macroeconomics 168 00:17:43.100 --> 00:17:47.900 of the Austrian School, and particularly the Austrian Theory of the Business Cycle, are 169 00:17:47.900 --> 00:17:55.000 foreign to modern economists whose training is exclusively in labour-based macroeconomics. 170 00:17:55.000 --> 00:18:00.340 In today's profession, a given capital stock has become one of the defining assumptions 171 00:18:00.340 --> 00:18:03.960 underlying the conventional macroeconomic relationships. 172 00:18:03.960 --> 00:18:08.600 To allow capital to be a variable rather than a parameter is to change the subject matter 173 00:18:08.600 --> 00:18:12.300 from macroeconomics to the economics of growth. 174 00:18:12.300 --> 00:18:18.260 Further, modern economists tend to think of capital holistically in terms of stocks and 175 00:18:18.260 --> 00:18:25.160 flows, which precludes any consideration of changes to say nothing of unsustainable changes 176 00:18:25.160 --> 00:18:27.180 in the capital structure. 177 00:18:27.180 --> 00:18:32.140 Gordon Tullock's bafflement at the Austrian theory is illuminating in this regard. Tullock 178 00:18:32.140 --> 00:18:38.060 takes Rothbard's essay as canonical and explains why the Austrians are wrong about depressions. 179 00:18:38.060 --> 00:18:44.020 This article, together with a comment by Joseph T. Salerno and reply by Tullock, merit careful 180 00:18:44.020 --> 00:18:48.940 study. According to Tullock's understanding of the Austrian theory, the boom is a period 181 00:18:48.940 --> 00:18:53.700 during which the flow of consumer goods is sacrificed so that the capital stock can be 182 00:18:53.700 --> 00:18:59.780 At the end of the boom, then, the capital stock would actually be larger, and the subsequent 183 00:18:59.780 --> 00:19:03.340 flow of consumer goods would be correspondingly greater. 184 00:19:03.340 --> 00:19:08.220 Therefore, the period identified by the Austrians as a depression would instead be a period 185 00:19:08.220 --> 00:19:13.380 marked by increased employment, labour as complementary to capital, and a higher standard 186 00:19:13.380 --> 00:19:14.620 of living. 187 00:19:14.620 --> 00:19:20.060 The stock-flow construction that underlies this line of reasoning does not allow for 188 00:19:20.060 --> 00:19:25.900 for the structural unemployment that characterizes the crisis, much less for the complications 189 00:19:25.900 --> 00:19:28.660 in the form of the Secondary Depression. 190 00:19:28.660 --> 00:19:34.500 This exchange between Tellic and Salerno gives the modern student of Austrianism a good feel 191 00:19:34.500 --> 00:19:40.720 for the challenge involved in the exposition of Austrian theory in an academic environment 192 00:19:40.720 --> 00:19:45.340 unreceptive to a capital-based macroeconomics. 193 00:19:45.340 --> 00:19:51.860 Capital-based macroeconomics is simply macroeconomics that incorporates the time element into the 194 00:19:51.860 --> 00:19:54.900 basic construction of the theory. 195 00:19:54.900 --> 00:19:58.300 Investment now is aimed at consumption later. 196 00:19:58.300 --> 00:20:03.740 The interval of time that separates the employment of means and the eventual achievement of ends 197 00:20:03.740 --> 00:20:09.100 is as fundamental a variable as are the more conventional ones of land and labour. 198 00:20:09.100 --> 00:20:14.660 The Austrian theory features the time element by showing what happens when the economy's 199 00:20:14.660 --> 00:20:21.420 production time, the degree of roundaboutness, is thrown out of equilibrium by policies that 200 00:20:21.420 --> 00:20:24.460 override the market process. 201 00:20:24.460 --> 00:20:30.820 Beyond this general understanding, as already suggested, the focus of particular expositions 202 00:20:30.820 --> 00:20:36.360 vary in accordance with the historical and institutional setting. 203 00:20:36.360 --> 00:20:42.500 The fact that each of the essays in this volume reflects its own time and setting does not 204 00:20:42.500 --> 00:20:48.500 does not imply a myopia on the part of its author, rather, it suggests the versatility of the theory. 205 00:20:48.500 --> 00:21:02.500 Writing in the early 1930s, for instance, Mises called attention to the flight into real values that characterizes a hyperinflation, such as the one experienced in Germany in 1923. 206 00:21:02.500 --> 00:21:08.500 This lesson, though, transcends the insights into that particular historical experience. 207 00:21:08.500 --> 00:21:13.820 Since over a period of years, capital has been misallocated by an accelerating credit 208 00:21:13.820 --> 00:21:15.260 expansion. 209 00:21:15.260 --> 00:21:17.980 There is no policy that avoids a crisis. 210 00:21:17.980 --> 00:21:21.780 In the modern vernacular, there is no possibility of a soft landing. 211 00:21:21.780 --> 00:21:26.740 Decelerating the expansion will cause real interest rates to rise dramatically as credit 212 00:21:26.740 --> 00:21:30.740 becomes increasingly scarce, bankruptcies would follow. 213 00:21:30.740 --> 00:21:35.820 Further accelerating the expansion will cause hyperinflation and a collapse of the monetary 214 00:21:35.820 --> 00:21:36.820 system. 215 00:21:36.820 --> 00:21:41.820 Mises is telling us, in effect, that the central bank can print itself into trouble, but it 216 00:21:41.820 --> 00:21:44.540 cannot print itself out of trouble. 217 00:21:44.540 --> 00:21:50.900 Writing in 1970, Hayek refers to the central bank's dilemma by suggesting that on the 218 00:21:50.900 --> 00:21:57.680 eve of the crisis, the policymakers find themselves holding a tiger by the tail. 219 00:21:57.680 --> 00:22:03.060 He gives play to the political and economic forces that were then dominant by relating 220 00:22:03.060 --> 00:22:13.820 The final throws of the boom take the form of a dual between labor unions, which have 221 00:22:13.820 --> 00:22:18.620 the political power to force wage rates higher, and the central bank, which can bring them 222 00:22:18.620 --> 00:22:23.460 back down, in real terms, by accelerating the rate of inflation. 223 00:22:23.460 --> 00:22:27.140 Although Hayek above all others is to be credited with shifting the focus of business cycle 224 00:22:27.140 --> 00:22:33.020 theory from labor markets to capital markets, he offers few clues in this essay about disequilibration 225 00:22:33.020 --> 00:22:47.020 in the intertemporal structure of production. Instead, he recognizes that the political and economic dynamics of the period have given special relevance to the problem, he even calls it the central problem, of wage determination. 226 00:22:47.020 --> 00:22:57.020 The application of the Austrian theory of the business cycle in today's economy would give little play to the fear of hyperinflation or to the problem of a wage-price spiral. 227 00:22:57.020 --> 00:23:03.340 The central problem today is chronic and dramatic fiscal imbalance. 228 00:23:03.340 --> 00:23:07.780 Budget deficits rather than credit expansion are found to be the focus in any plausible 229 00:23:07.780 --> 00:23:13.980 account of the effect of the government's macroeconomic policy on the economy's performance. 230 00:23:13.980 --> 00:23:17.700 Still, the central bank figures importantly into this story. 231 00:23:17.700 --> 00:23:23.060 The very potential for monetizing the Treasury's debt eliminates the risk of default, and thereby 232 00:23:23.060 --> 00:23:27.660 puts the Treasury on a much longer leash than it would otherwise enjoy. 233 00:23:27.660 --> 00:23:32.780 The problem of an artificially low rate of interest in earlier episodes is overshadowed 234 00:23:32.780 --> 00:23:37.540 by the problem of an artificially low risk premium on government debt. 235 00:23:37.540 --> 00:23:42.620 Although risk-free to the holders of Treasury securities, this black cloud of debt overhangs 236 00:23:42.620 --> 00:23:48.100 the market for private securities, distorting the economy's capital structure and degrading 237 00:23:48.100 --> 00:23:50.140 its performance generally. 238 00:23:50.140 --> 00:23:54.300 There are some modern applications of the Austrian theory that take these considerations 239 00:23:54.300 --> 00:23:58.340 into account, but much remains to be done. 240 00:23:58.340 --> 00:24:04.340 A stock-taking of the modern alternatives to the Austrian theory suggests that capital-based 241 00:24:04.340 --> 00:24:07.700 macroeconomics may be due for a comeback. 242 00:24:07.700 --> 00:24:12.380 Conventional Keynesianism, whether in the guide of the principles level Keynesian cross, 243 00:24:12.380 --> 00:24:18.660 the intermediate ISLM, or the advanced ASAD, is formulated at a level of aggregation too 244 00:24:18.660 --> 00:24:23.780 too high to bring the cyclical quality of boom and bust into full view. 245 00:24:23.780 --> 00:24:28.660 Worse, the development of these tools of analysis in the hands of the modern textbook industry 246 00:24:28.660 --> 00:24:34.020 has involved a serious sacrifice of substance in favour of pedagogy. 247 00:24:34.020 --> 00:24:38.660 Students are taught about the supply and demand curves that represent the market for a particular 248 00:24:38.660 --> 00:24:41.620 good or service, such as hamburgers or haircuts. 249 00:24:41.620 --> 00:24:47.900 They are then led into the macroeconomic issues by the application of similar looking supply 250 00:24:47.900 --> 00:25:04.900 The Transition to Aggregate Supply and Aggregate Demand, which is made to look deceptively simple, hides all the fundamental differences between microeconomic issues and macroeconomic issues. 251 00:25:04.900 --> 00:25:12.900 While these macroeconomic aggregates continue to be presented to college undergraduates, they have fallen into disrepute outside the classroom. 252 00:25:12.900 --> 00:25:22.900 One recent reconsideration of the macroeconomic stories told to students identifies fundamental inconsistencies in ASAD analysis. 253 00:25:22.900 --> 00:25:29.900 Conventional monitorism employs a level of aggregation as high as if not higher than that employed by Keynesianism. 254 00:25:29.900 --> 00:25:35.900 While Milton Friedman is to be credited with having persuaded the economics profession and much of the general citizenry 255 00:25:35.900 --> 00:25:39.840 In the theory of the strong relationship between the supply of money and the general level 256 00:25:39.840 --> 00:25:44.880 of prices, his monetarism adds little to our understanding of the relationship between 257 00:25:44.880 --> 00:25:45.880 boom and bust. 258 00:25:45.880 --> 00:25:50.000 The monetarists have effectively countered the Keynesians on many fronts, but they share 259 00:25:50.000 --> 00:25:55.200 with them the belief that macroeconomics and even business cycle theory can safely ignore 260 00:25:55.200 --> 00:25:58.560 all considerations of a capital structure. 261 00:25:58.560 --> 00:26:04.280 Modern spin-offs of monetarism, which incorporate the ideas of rational expectations and instantaneous 262 00:26:04.280 --> 00:26:08.320 These market-clearing have brought the time element back into play. 263 00:26:08.320 --> 00:26:13.840 Overlapping generations models, and particularly the time-to-build models, seem to have some 264 00:26:13.840 --> 00:26:19.120 relationship to Austrian ideas, but the emphasis on the development of modelling techniques 265 00:26:19.120 --> 00:26:24.000 over the application of the theory to actual episodes of Oum and Bast has greatly diminished 266 00:26:24.000 --> 00:26:27.400 the relevance of this strand of macroeconomic thought. 267 00:26:27.400 --> 00:26:33.100 In recent years, there has been an increasingly widespread recognition that modern macroeconomics 268 00:26:33.100 --> 00:26:38.400 is in disarray. Today's textbooks and professional journals are replete with models that, while 269 00:26:38.400 --> 00:26:43.600 impressive in their display of techniques, are profoundly implausible and totally inapplicable 270 00:26:43.600 --> 00:26:48.820 to the world as we know it. The inadequacies of modern economics have caused some academicians 271 00:26:48.820 --> 00:26:54.620 to wonder, if only facetiously, how far back do we have to go before we can start all over? 272 00:26:54.620 --> 00:26:59.300 The essays in this volume provide a substantive answer to that question. We have to go back 273 00:26:59.300 --> 00:27:05.340 about 60 years to a time when capital theory was an integral part of macroeconomics. We 274 00:27:05.340 --> 00:27:10.700 have to go back to the Austrian School. A modernized capital-based macroeconomics can 275 00:27:10.700 --> 00:27:16.980 compare favorably with any present-day rivals. Murray Rothbard's essay ends with an anticipation 276 00:27:16.980 --> 00:27:23.020 of the Austrian revival, which actually began with his help in 1974. This volume is offered 277 00:27:23.020 --> 00:27:27.440 in the spirit of Rothbard, and in the hope that the Austrians will have an increasing 278 00:27:27.440 --> 00:27:31.440 influence in the years ahead on the development of business cycle theory.