wtorek, 15 lutego 2011

John Quiggin on ABCT

John Quiggin, an Australian economist and professor at the University of Queensland, offers his view on Austrian Business Cycle Theory:


Quiggin starts by saying he shares his view on ABCT with Bryan Caplan. I was sort of disappointed, because I had already done Caplan on ABCT before:


So predictably Quiggin starts with the tired accusation that Austrian School "hasn’t developed in any positive way since" 1920s. Similar to Caplan, Quiggin confuses mainstream catching up, in more roundabout ways (obligatory tons of calculus), with Austrian School as of 1920s with "positive development". Better call it retarded development.

Hence, Quiggin sees Austrian School as an example of "ossified dogma" that "cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections". Like with the recent Lord Keynes praxeology critique, I got immediatelly excited, sounded very promising. Unfortunatelly, I got duped again, looks like my naive optimism is incurable. As it turns out later in the article, John actually means... Panic of 1837... Hmmm, so what exactly were the alleged Austrian School economists before 1837 whose predictions were then violated empirically and who failed to respond in a progressive way? Beats me...

Some basically correct history and data follows (lengthy, as with Lord Keynes), like when Quiggin correctly states that the business cycle Austrian School "tried to explain predated both central banking in the modern sense of the term and the 20th century growth of the state." Very good. Austrian School simply explains business cycle that results from new money not backed by specie. It does not matter how you organize it, in the "modern" sense or not. "Modern" theft does not become less theft just because it is modern. In theory, business cycle could also happen in a completely free banking system, like between 1837 and 1862. In practice, it has always happened with some sort of government aggression. "Modern" approach is to use government money monopoly and fractional reserve banking. But a government endorsement of private banks is more than enough too, and that was the most popular approach throughout 19th century (even though the Panic of 1837 was surprisingly "modern" as we'll see later).

About 3/5 through the article we finally get to the first critique. Quite oblique one though. If I had not done Caplan before, I might have even not recognized it as such. It follows a couple of praises like that the "Mises-Hayek business cycle theory was actually a pretty big theoretical advance" and that "the Austrians were the first to offer a good reason for the non-neutrality of money", so no warning signs. But when I read about "(sub)optimality of market outcomes", then I start to fret. Either entrepreneurs or consumers or free market itself is then somehow always stupid, with the economist always playing the condescending wise guy pointing out allegedly "irrational" things. Irrational that is, according to the economists' simplistic models. And here it is: "If investors correctly anticipate that a decline in interest rates will be temporary, they won’t evaluate long-term investments on the basis of current rates." In other words, entrepreneurs must be stupid if they cannot predict if low interest rates are only temporary or not, so they are clearly also not rational, and "there’s no reason to think that market outcomes will be optimal in general". Same as Caplan, Quiggin obviously confuses devine clairvoyance with business rationality. You can easily get rich 10 times over and over again by correctly recognizing customer needs (hence maximize optimality of market outcomes) before you are able to "correctly anticipate that a decline in interest rates will be temporary". Only ivory tower economists can make such absurd statements about the real world business people.

Interestingly though, with Caplan we already have two serious mainstream economists stating businessmen should somehow predict future interest rates to estimate long-term profitability of investments. This sounds great in a free market system. After all, as Rothbard has said, businessmen are all "trained to estimate changes and avoid error". However, with current government aggression of fractional reserve banking directed by economists, what economists are in fact saying is, businessmen should be able to predict what economists themselves will do in the future! And who is best to help businessmen out in that prediction, for a reasonable fee via financial consulting service, just in case they lack devine clairvoyance?

Further, virtually identical as one of Caplan points, Quiggin throws generic statement like "Austrian model implies that consumption should be negatively correlated with investment over the business cycle, whereas in fact the opposite is true". Consumption of what products? Consumption of products that actually reflect real consumer value scales is indeed negatively correlated with investment over the business cycle, according to Austrian model itself. Wal-Mart suffers relative to Whole Foods during boom, then vice versa during depression.

Then we read "finally, the Austrian theory didn’t say much about labour markets". So we have "finally" already? Again, felt duped, after so grand expectations. Quiggin states that "it was left to Keynes to produce a theory of how the non-neutrality of money could produce sustained unemployment." But what more can there be said about sustained unemployment by Austrians really? Just keep subsidizing private bankers and creditors by ultra low central bank interest rates and new money pumping after recession hits, just as Keynes likes it. Sustained unemployment guaranteed, says Austrian theory about labour markets today in 2011, exactly same what it said in 1920s. On the other hand, no doubt there's been a lot of ratarded "positive development" by Keynesians in the meantime.

There is some more after all. Hayek and Mises "took a nihilistic ‘liquidationist’ view in the Great Depression, a position that is not entailed by the theory, but reflects an a priori commitment to laissez-faire". Wow, "nihilistic" and "liquidationist" so scary! Run, Forest, run, don't ever think for yourself! Well, Hoover and Roosvelt were certainly not "liquidationist". They were the compassionate guys, and creative as hell ;) The results of their lack of "a priori commitment to laissez-faire" were still obviously dismal:

US Census Bureau statistics show that the official unemployment rate was still 17.2 percent in 1939 despite seven years of "economic salvation" at the hands of the Roosevelt administration (the normal, pre-Depression unemployment rate was about 3 percent). Per capita GDP was lower in 1939 than in 1929 ($847 vs. $857), as were personal consumption expenditures ($67.6 billion vs. $78.9 billion), according to Census Bureau data. Net private investment was minus $3.1 billion from 1930–1940.

As he nears towards the end, Quiggin cannot understand why "the choice of policy [that causes business cycle] varies from Austrian to Austrian." He enumerates four proper (the other two he mentions in same breath, free banking and competing currencies, are actually Austrian policies): paper money, want a gold standard, central banks and fractional reserve banking. Now, Quiggin, a small IQ quizz for an economist: what do they all have in common? Correct answer: they are all government tools to inflate fiat money.

Finally, Quiggin classifies the Panic of 1837 as part of the free banking period. That's as if we classified Black Tuesday of 1929 as part of Hoover/Roosvelt era. Hoover/Roosvelt did manage to prolong the Great Depression till 1939, but how can I blame them for 1929? I have to blame their predecessors that inflated money supply in the 1920s, as Rotbard superbly does in America's Great Depression (http://mises.org/rothbard/agd.pdf). Analogously, the free banking period did start in 1837, but not before a period of runaway inflation thanks to fractional reserve banking under the auspices of Second Bank of the United States in the 1830s:

"For every new Mexican silver dollar deposited in a bank by an American merchant or manufacturer, the bank created at least five new paper dollars or paper credits."

So what business cycle Quiggin means when he says that "US had free banking from the Jackson Administration to the Civil War and that didn’t stop the business cycle"? Beats me. Lots of bank bancruptcies in that period, sure, but no depression in that period that I know of. The Panic of 1837 is just an example of fractional reserve banking catastrophe in 1830s.

I can only wonder where Quiggin read that "Rothbard offers some historical revisionism to argue that the Panic of 1837 didn’t really happen". See eg


President Van Buren also set a staunch laissez-faire course, in the Panic of 1837.

I can't really see a ", that didn't really happen" after 1837...

But I feel truly helpless when Quiggin states that "free banking in late 19th century Australia didn’t prevent a huge boom and subsequent long depression around 1890". Quiggin really should have some mercy, unless he intends his blog to be read only by his fellow Aussie economists. So what now, are we supposed to believe him just because there is so little available online on that particular depression? Can't he defend his points using well known depressions?

5 komentarzy:

  1. I'd be unsurprised, if disappointed, to see an American dismissing evidence because it comes from a small country far away. It's more disappointing coming from someone who is, I assume, writing from Poland. Should we ignore Polish experience under communism because only you and your fellow Poles know about it?

  2. Great to hear from you, John!

    Well, yes, I write from Poland, but as you've noted, I don't use any Polish specifics in my arguments. Not that there is anything wrong with Polish specifics (or Australian for that matter). It's just we live in a US/UK centric world. Which is all very well, because then everyone can work on exactly same well-known data. I would never dare to ask you to familiarize yourself with Polish 19th century depressions. Obviously, you are in significantly better position, at least all Australian sources are in english, but still I couldn't find much on the allegedly free banking depression around 1890. I can't simply believe you there has been not even, say, some sort of government endorsement of private banks.

  3. Hi Joanna,

    Here's a quote from a paper with a relatively positive view of the free banking era, which nonetheless notes the systemic collapse of 1893

    Australia provides a textbook example of free banking in practice. One writer on the subject commented that in Australia “the legal framework with which banks operated was perhaps the least restrictive of any on
    record” (Dowd 1992).Butlin (1953),commented that "there was no
    tender law, no central bank, no legal control over the total volume of bank loans, and only a very primitive control by the banks themselves through a loosely applied rule of thumb (cash reserves should be to one-third the sum of deposits and notes) concerning reserves against all liabilities”.

    the 1840 Colonial Bank Regulations issued by British Treasury governed colonial banking. The requirements included that: capital should be a determinant amount and must be fully subscribed; total debts must not exceed three times the paid up capital and that all notes were to be payable on demand in specie at the place of issue. Failure to pay on demand for a total of 60 days in any year entailed forfeiture of incorporation. Personal liability for bank shareholders was capped at an amount equal to twice capital and loans against real estate, shops or merchandise were to be prohibited. Amendments to the regulations in 1846 limited the note issue to the amount of paid up capital.
    Banking was not substantially affected by the regulations, however. For example, the restrictions on total debt and note issue were largely ignored (Butlin 1986). Likewise, banks found loopholes around the prohibition on lending for land (Pope 1989). In practice, Australian colonial banks were allowed to raise the limits on note issue by including coin and bullion in paid-up capital. Over time, even this stricture was relaxed; by 1856 the Bank of Australasia secured a licence to print private notes up to the value of three times its specie and bullion holdings. Reserve requirements were easily met as “double counting” was permitted: reserves used to back the note issue were simultaneously used to provide liquidity in the event of a deposit withdrawal. Rules limiting total indebtedness were also no threat because deposits were excluded.
    This freedom of note issue was, however, accompanied by strong liability provisions. In most colonies by the late 1860s, shareholders had unlimited liability for their note issue (Pope 1989).

    Economic Papers: A journal of applied economics and policy

    Volume 17, Issue 4, pages 7–29, December 1998

  4. John, but this is just another example of ABCT validity. ABCT "merely" describes how recession has to (and should) follow money supply inflation not backed in specie. And this is exactly what happened in 1890 Australia according to your source, by the very fact that fractional reserve banking was legal ("cash reserves should be to one-third the sum of deposits and notes").

    I think we have simply misunderstood each other. When a libertarian hears that something is "free" he automatically equates it with "lack of aggression", as in "free market". But a libertarian would not call a market "free" if stealing were legal, even though it would have surely decreased the number of "regulations". Same for "free" banking. For a libertarian, there is no "free" banking as long as theft (fractional reserve banking) is legal. I simply thought you meant Australia had free banking as libertarians understand it, ie lack of both central bank AND fractional reserve banking.

    But then I see I was not consistent in my position. I have to make sure I am against any (ie also private) money supply inflation not backed in specie. Thanks!

  5. BTW, actually my postition is that even both central bank and fiat money are fine (both private and public), provided there is zero money supply inflation, and fractional reserve banking ("cash reserves should be to one-third the sum of deposits and notes") is precisely the tool to achieve that.