27 Aug 2008

Tyler Cowen Accidentally Confirms Austrian Business Cycle Theory

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This is almost too delicious to be true. Back in January 2005, Tyler Cowen (an econ prof at George Mason who runs the very popular blog MarginalRevolution) had a post titled, “If I believed in Austrian business cycle theory.” It’s hilarious because Cowen did (and does) not believe in ABCT, yet his “predictions” were uncanny–I encourage you to click the link and see for yourself, and remember what things felt like back in early 2005.

Anyway, Austrian enthusiasts have been calling him out on it lately, and Tyler is a good sport about it here. (I should mention that there is also a discussion of breast implants, if that encourages you to click the link.)

I really can’t understand the reticence of some free market economists (not just Tyler Cowen, either) to blame the housing boom and bust on the Federal Reserve. This was an almost textbook illustration of ABCT. As I explain in this article:

The case against the Fed is straightforward: In an attempt to jumpstart the economy out of recession, Greenspan slashed the federal funds target from 6.5% in January 2001 down to a ridiculous 1% by June 2003. After holding rates at 1% for a year, the Fed then steadily ratcheted them back up to 5.25% by June 2006. The connection between these moves by the central bank, versus the pumping up and popping of the housing bubble, seemed to be more than just a coincidence. On the contrary, it looked like a classic example of the Misesian theory of the business cycle, in which artificially low interest rates lead to malinvestments, which then require a recession to correct.

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