I have been so busy I haven’t had time to lavish praise on John Carney, who has been doing his part to bring Austrian business cycle theory to the table at CNBC. For example, a few weeks ago he ran this interesting piece. Here’s the intriguing intro:
It’s no accident that Austrian economics is newly popular. It provides the best explanation for the business cycle we just lived through.
But the resurgent popularity of Austrian economics may actually be hampering the ability of the Federal Reserve to reflate the economy with low interest rate policies. Businesses, now aware of the dangers of a low inflation- sparked economic bubble, may simply be refusing to fall for the age-old boom-bust trap.
I’m very sympathetic to Carney’s position. In fact, I had the same intuition when I wrote up a formal model–which relied on entrepreneurs who updated their beliefs according to Bayes’ Law and obeyed rational expectations–where manipulation of interest rates could (a) cause more booms than would otherwise other and (b) lead to more sluggish growth than would otherwise occur.
However, in that model (as well as Carney’s exposition), business people wouldn’t necessarily fall for the bait of lower interest rates. In my model, the idea was that the interest rate gave a signal about the underlying state of the economy, and the Fed’s interventions introduced noise.
I don’t think that is the whole story, but I do think it is closer to the original spirit of the Mises-Hayek exposition, than the Carilli-Dempster attempt to frame ABCT as a prisoner’s dilemma. For one thing, in a genuine prisoner’s dilemma, nobody ever slaps his head and says, “I can’t believe I defected! What was I thinking?!” But in the standard exposition of Austrian business cycle theory, the entrepreneurs do say, “Oh no, there aren’t enough resources to get me through this project. I wish I hadn’t started it.”
I wrote the paper when I was a professor at Hillsdale. I sent it to the RAE, thinking they would surely like an exposition of ABCT that was consistent with rat ex and Bayesian updating. But the referees were fools, which just means they didn’t like my paper.
Here is the latest version of the paper. As I put in a note, I no longer necessarily endorse the first section where I critique Carilli-Dempster. But the rest of the paper is still worthwhile, I think.