21 Oct 2008

I Can Die Now

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Tyler Cowen links to my article “The Importance of Capital Theory”–via a foreign website, strangely enough. You can read his post and my response, which is about 30 comments from the top.

What I don’t get is that Tyler keeps thinking the coincidence of high consumption and high investment is a problem for Austrian business cycle theory. No it isn’t. It is a cornerstone of Garrison’s Power Point expositions, and it’s in Mises and Hayek too. So it’s not merely that I’m scrambling to defend ABCT from this unexpected thrust; on the contrary, this feature is why the Austrians say the boom period is unsustainable.

In other words, what Tyler is calling an inconvenient truth for the Austrian explanation, is actually one of its necessary ingredients. If consumption fell in order to free up resources to “fund” the expansion in investment, then there wouldn’t be a bust period. To switch to Krugman’s “hangover theory” label: It’s as if Cowen is saying, “Obviously the theory that the hangover is due to a drinking binge is silly. Why, drinking large amounts of alcohol can mess with your system.”

(If the above two sentences don’t make any sense, good. Just like Tyler’s “critique” of ABCT doesn’t even make sense, let alone is it correct.)

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