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August 25, 2005
Austrian deflection of RE accusation onto Keynesians
I've commonly heard the following argument against Austrian Business Cycle theory. Seeing as how it appears that the majority of the harm caused by the cycle is traced back to the fed increasing the money supply through the credit market, why do businessmen keep falling for it? In other words, everyone knows when and how the money supply changes so rational expectations should set in and alleviate the hazardous cyclical effects.
Defenses against this accusation that I've heard and tend to accept include 1) modeling the choice of businesses to accept government dictated loans and interest rates as a prisoner's dillema and 2) the realization that lots of people are either unaware or do not accept Austrian Business Cycle theory.
What I want to point out here is that the original accusation is a reasonable one to make but less so against Austrian Business Cycle theory and more so against Keynesians uncoordinating markets during liquidity traps and interest inelastic investment schedules (when the Keynes effect does not hold). Keynes tried to point out a discoordinated market condition of underemployment resulting from hording rather than spending. But his distinction between saving and investment spending is in vein and a complete misunderstanding of Say's Law. The new communication technology of knowledge about the money supply should go further to attack against Keynes than it does against Austrians. Savings without investment spending still sends signals about future production in a modern world where we know the money supply thanks to sources like the internet and newspapers.
Posted by djdamico at August 25, 2005 4:11 PM