Murphy vs. Cowen on Business Cycles

I have finally made it; Tyler Cowen links to me (sort of) at his blog. So here is my original article, "The Importance of Capital Theory." Then Tyler acknowledges it parenthetically in this post, though he chooses to filter it through a foreign website (presumably for tax purposes).

Incidentally, my article above lays out the basics of how capital consumption can give the illusion of prosperity for a brief time, but then reality sets in and a "recession" is physically inevitable. If you don't really get what I am talking about, but are interested to understand what physically might have happened with the world economy over the last few years, I recommend the big section in the article titled, "A Sushi Model of Capital Consumption." I.e. you can probably skip the first sections where I quote Krugman and Cowen, and jump right into the "model."


  1. The island metaphor is brilliant! (And there are some pretty good jokes in there as well.)

  2. Aww thanks Gene. I was originally going to do a bus driving through the desert, but some hack already used that one.

  3. Bob, this is a really fantastic article. Thank you for it.

  4. I actually forgot I wrote that.

  5. I have a challenge/questions for either Bob Murphy or Gene Callahan (or both). My questions derive from a recent post by David Ramsay Steele on the Libertarian Alliance discussion group on Yahoo. I know Mr. Callahan is familiar with the "snarky" Steele.
    1) Bob Murphy explains how consumption and investment can increase at the same time in his recent article but Steele wants to know how it is possible the artificial boom can go on for years, not just months.
    2) Steele says that if higher order goods really are as heterogeneous as Austrians claim, then why was there not a slump in the US immediately after WW2 ended due to the transition from a war economy?
    I greatly appreciate your time.

  6. I just re-read B. Murphy's article and I do see that he analogizes the short time frame depicted on the fictitious island with the longer time frame of a modern economy. I withdraw that question, but no.2 remains.

  7. Bob, just curious - do you understand that the destruction of unowned or state-owned but privately-exploited common resources, including natural resources that provide public good, is a type of "capital consumption"?

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