Haberler's Summing Up of Austrian Business Cycle Theory
""The most valuable and original contributions of the monetary over-investment theory are
(1) the analysis of the maladjustment in the structure of production brought about by the credit expansion during the prosperity phase of the cycle and
(2) the explanation of the breakdown as consequent on that maladjustment.
But our analysis has also shown that the theory is not in all respects complete. The claim to exclusive validity is open to doubt. It is a little difficult, for example, to understand why the transition to a more roundabout process of production should be associated with prosperity and the return to a less roundabout process a synonym for depression. Why should not the original inflationary expansion of investment cause as much dislocation in the production of consumers' goods as the subsequent rise in consumers' demand is said to cause in the production of investment goods?" -- Prosperity and Depression
(1) the analysis of the maladjustment in the structure of production brought about by the credit expansion during the prosperity phase of the cycle and
(2) the explanation of the breakdown as consequent on that maladjustment.
But our analysis has also shown that the theory is not in all respects complete. The claim to exclusive validity is open to doubt. It is a little difficult, for example, to understand why the transition to a more roundabout process of production should be associated with prosperity and the return to a less roundabout process a synonym for depression. Why should not the original inflationary expansion of investment cause as much dislocation in the production of consumers' goods as the subsequent rise in consumers' demand is said to cause in the production of investment goods?" -- Prosperity and Depression
Argh it's times like these I wish I were a tenured college professor. I promise you I was SO CLOSE to having a better model than my "sushi economy" to explain this stuff. (I was working on it in response to Tyler Cowen's objections to the sushi article.) I had the basic framework down, and I was just toying with the numbers...and then I got swamped with day job stuff, and now I can't remember how it worked.
ReplyDeleteThat's too bad, and I'd like to see it, but remember the above is my report in on Haberler: I am researching the history of cycle theories right now, and reporting in on what I find. That I post a remark doesn't mean I agree with it! (Of course, it doesn't mean I disagree either.)
DeleteActually, I think Harberler's argument is better applied during "healthy" movements of capital to earlier stages. During an artificial boom, the capital is going from a profitable investment to an even more profitable investment. The bust, on the other hand, is characterized by a collapse of profits throughout the structure of production (without being expected), explaining the shock.
ReplyDeleteA "healthy" movement of resources to earlier stages, though, requires a fall in nominal expenditure towards consumption, implying a diminution of profit for second stage firms and earlier firms based on this imputation of income. Even if we assume that there are profitable opportunities elsewhere, this still represents a demand-side shock to output, doesn't it?
I can think of a lot of ways to defend ABCT (not that all of them are right), even in light of this, but it's still something to think about.