More nonsense on ABCT by Lord Keynes

In a blogpost, the enthusiast for the current social order "Lord Keynes" makes a bold statement. He claims that the Austrian Business Cycle Theory which states that excessive credit creation leads to overconsumption and mailinvestment does not explain the 2007-2009 financial crisis.

Here is the most important of the summary:

"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."

This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.

Let me add a quote to show the jist of his reasoning:

"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406

He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.


Another lie and misinformation Lord Keynes debunked, I will surely return with more :)

Steve Keen mistakes on ABCT and the Austrians

I will here outline some very basic mistakes in Steve Keens book “Debunking Economics” where he assess shortly the Austrian School and particularly his attempt to address Austrian Business Cycle Theory.

Confusion over ABCT
Steve Keen claims that the Austrian business cycle theory is one that attempts to explain the business cycle by the fact that the central bank lowers interest rates. This is a mistake, as the ABCT is a theory that explains the business cycle as a consequence of an expansion money and credit affecting relative prices and leading to capital and resource misallocation. The discernible difference between monetary and credit expansion that must lead to capital misallocation and what must not, is dependent upon the amount of savings that can counteract or allow for the expansion. There is no clear macro-aggregate or measureable aggregate statistical number that can be computed to necessarily reveal this, but it can and often is reflected in the amount of savings not increasing (or decreasing) while money and credit is expanding.
If the ABCT was simply a theory of how central banks can create booms-and-busts, then it would not be a theory that could explain why business cycle occurs before central banking. But that was precisely what it was and the reason it was thought out. This is why Mises(1949) places business fluctuations under the analysis of a market economy and not an interventionist regime.

Lets now quote Steve Keen in his first reference to ABCT:

“and the latter[the Austrian School economists] because of their familiarity with Hayek`s argument about the impact of interest rates being held too low by government policy.” (p. 326)

The ABCT in fact lays the casual factor again on artificial increases of credit or rather increases not corresponding to an relative increase in voluntary savings.
Had Steve Keen consulted one or more of the dozens of articles by Austrians scholars in the run up to the financial crisis predicting the crisis, the focus is expressly on money, credit growth and the interest rate policy that encouraged it. Indeed this is why for example Jesus Huerta de Soto locates the start of the boom in 1992 and the expansionary monetary policy that did not end until 2007, and not with Greenspan interest rate cuts in 2001 although that was an extension of the policy.
This can be produced both in a free fractional reserve banking system and in a highly regulated central banking system such as today. It can also be produced by financial participants that engage in maturity mismatching. What the central bank can do, even without actively inflating is to guarantee that the banks can themselves inflate by extending loans and being backstopped by the central bank. That is the raison d’être of the central banks and the reasons almost all Austrians would cherish its demise in an attempt to avoid/limit business cycles and other ill-effects of inflation.
The fact though is that the central banks actively target goals to accomplish a certain amount of inflation that is to be achieved through credit growth and often actively encourage credit expansion.

If one read the listed material of Austrian authors on the business cycle by Steve Keen such as Murray Rothbard(Americas Great Depression) this would be absolutely clear and the comments above almost completely unnecessary, I only bring them up because all these considerations are ignored and certain arguments against ABCT is formed that are wrong in the light of these considerations.

They are:

“they argue that the current system of state money means that the money supply is entirely exogenous, and under the control of the state authorities” (p.447)

If the monetary supply is completely “endogenous” as the Post Keynesians like to hold, the current monetary easing should not be expected to be able increase prices at all, as deleveraging and deflation is the goal either way. If the Austrians are right the monetary expansion that has taken place if continued will again lead either to higher price-inflation or credit growth.
Furthermore this presumes that Austrians hold that monetary growth under the current system can only take place via an increase in base money, or reserves. This is far from the case, but the ability, willingness and in fact expansion of base money of the central bank encourages the commercial banks to extend further credit with their legal granted monopolies and guarantees of being saved by the central bank should they find themselves in need of money. This is then a false accusation and indicates yet again that Keen seems to be unaware or unlearned of the position he is critiquing.

“…private banks and other credit-generating institutions largely force the state`s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.”(p. 447)

“empirical…supports post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between state-determined component of money supply and broad credit shows that the latter “leads” the former” (p. 447)

“If the Austrians were correct, state money creation would instead precede private credit creation.” (p. 447)

There is also the strange notion of statistically “proving” this by appealing to what follows of the these two aggregates, focusing on these two aggregates misses the whole institutional set up and ignores the fundamental aggression against private property and its natural restrictions on bank credit expansion that have been detailed in the works of Austrian economists since Mises and by classical authors before him.
None of these elements are discussed, thus leaving an important economic and legal aspect of banking practices out of the analysis. To claim that private banks “force” the state hands is simply presuming his conclusion and assuming away any guilt on the central bank for constantly expanding the supply of money. Lobbying, demanding and appealing for the monetary policy which benefits them the banks certainly do. But that does not warrant Keens label of it “forcing the state hands”. A follow-up question to that statement then is, what would the banks do if the state did not have a monopoly over money? There would be no hands to force, and they would have to go bankrupt as they should. And they would also be aware of this.

Furthermore if all banks are compelled by government edict to be a member of the state bank, and all deposits with them insured to what extent are they private?
This would at least not meet the definition of private in any other field and this seems to mere rhetoric by followers of the socialistic "Post-Keynesian" school.
If it has any importance at all, it seems to be more of the debate between the various current mainstream schools of thought and not the Austrian theory of money and banking. Austrians do not claim that all expansion of money is actively engineered by the central bank, as I have stated it can simply backstop their members and leave it to them, the problem is of course the only way any trust is placed in that backstopping is because of the monopoly over the supply of cash or "base money".
This claim is seems even more ridiculous and thinly based once one recognises the fact that in the financial crisis of 2007-08, if the government edict interest rates were removed and market rates were allowed to form or by simply keeping the interest rates up the market participants would have deflated severely the broad money and credit aggregates thar Keen focuses on. It was in fact the actions of the central bank in the US and around the world which kept this from happening and thus illustrates the erroneous nature of his claims.

“monetarism also provides an evocative counter-example.” (p. 447)

To envoke monetarism as a counter-example also seems to be completely missing the point and misleading. No Austrian has only fought against an expansion of base money, but an expansion of broad money. The fact that Austrians all are against an expansion of the supply of base money, does not equate them to monetarists who also want to limit the supply of base money. Secondly, the fact that the current central banking system failed to keep credit growth from growing is no surprise.
It is precisely the reason why Austrians focuses on getting rid of central banking, and advocate 100 % market commodity money. The classical Austrian position that Keen completely ignores in his argument against them and the only true form of endogenous market money would be the money chosen under freedom of contract.

Some last comments
“a non evolutionary attitude towards both the existence of the state…the state was simply imposed from outside as an alien artifact”
“This is certainly one way to consider to the growth of the welfare state….an equally tenable argument…evolved as a response to the failure of the pure market system during the Great Depression”

These comments appear as a weakness of the Austrians, but it is more of a weakness and misleading description by Steve Keen. The existence of the state is seen as evolutionary by rothbardians, as state rulers and the nature of their justifications and the choice of state leaders, and the peoples convictions and interactions has changed. But if by evolutionary it means that the state will or must naturally arise, then this is of course an anathema to the Rothbardian view of the state.
Secondly, it is weak because it confuses the state as an institution with the welfare state. As if the growth of state argued against is only in the form of the welfare state.
Thirdly, it is downright dishonest to label the period before or during the Great Depression as a pure market economy. Especially to a group of scholars who locate the problem of business cycles with fractional-reserve banking, government meddling with money and credit, in its worse form central banking and fiat money. As central banking in America was established in late 1913, the history of events is more fitting with the Austrian detest of central planning in money, banking and finance simply broadening out the business cycle and exacerbating it. It is in fact the Post-Keynesians and in general the economic professions admiration for central planning in this arena which is an anathema both in the historical examples and the basic theory of a dynamic/equilibrium market economy. To say that they are equally tenable is just a statement, and in contradiction with the historical facts around government intervention in the early 20^th century.

I get the sense that Steve Keen has simply attempted to fill his “Alternative schools of thought”-chapter on the Austrians with something, while actually not investigating the literature. Anyhow, the above comments are only certain observations and a more general critique of the Minsky approach to business cycles and other concepts in Keens “Keynesian” economics will be investigated and discussed in the future.

Did Mises & Hayek Not Predict the Great Depression ?

First there is this entry: Mises Did Not Predict the US Stock Crash of 1929 - 30. May 2011

He talks down on people, and starts by calling things myths without investigating.
He then gives a quote from Skousen book on the history of economic thought, even though most austrians regard it as a poor book and there are other direct sources that relates to this issue. This is a very typical, and pathetic style the blogger "Lord Keynes" has.

The quote:
"“As his assistant in the university seminar which met every Wednesday afternoon, I [i.e., Fritz Machlup] usually accompanied him home. On these walks we would pass through a passage of the Kreditanstalt in Vienna [one of the largest banks in Europe]. From 1924, every Wednesday afternoon as we walked through the passage for pedestrians he said: ‘That will be a big smash.’ Mind you, this was from 1924 onwards; yet in 1931, when the crash finally came, I still held some shares of the Kreditanstalt, which of course had become completely worthless” … In the summer of 1929, Mises was offered a high position at the Kreditanstalt bank. His future wife, Margit, was ecstatic, but Lu surprised her when he decided against it. ‘Why not’ she asked. His response shocked her: ‘A great crash is coming, and I don’t want my name in any way connected with it’ … (Skousen 2009: 295–296)."

Lord Keynes take on this is:

"this prediction of the failure ofone Austrian bank is transformed into the prediction of US stock market crash in 1929. Mises is alleged to have warned his future wife that “a great crash” was coming, but I have seen no evidence to suggest he was referring to America or a global depression, or anything other than the Kreditanstalt bank with that statement. "


That is surely a bizarre interpretation. He claimed a big crash was coming, not in any sense for only that bank. Additionally, given that Kreditanstalt was among the biggest banks in all of Europe and given the cycle theory that he had established and he was teaching his students, it is not hard to see this statements in its proper context. But Lord Keynes has an agenda to not see this.

Furthermore, these allegations are even more unfounded as the Federal Reserve policy was explicitly critiqued in his book from 1913, The Theory of Money And Credit. And later in other essays were he dealt with Irving Fisher "dollar stabilization" policy and his claim that it would eliminate the business cycle.

Here is Mises conclusion, in 1913 when speculating upon the Fisher plan and what should instead be done:

"It has gradually become recognized as a fundamental principle of monetary policy that intervention must be avoided as far as possible. Fiduciary media are scarcely different in nature from money; a supply of them affects the market in the same way as a supply of money proper; variations in their quantity influence the objective exchange value of money in just the same way as do variations in the quantity of money proper. Hence, they should logically be subjected to the same principles that have been established with regard to money proper; the same attempts should be made in their case as well to eliminate as far as possible human influence on the exchange ratio between money and other economic goods. The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion."

Now tell me "Lord Keynes", is this not what "Minskyites" would recommend to eliminate crisies, the curbing of credit creation ? Well, Mises knew this in 1913, accept it.

BTW Irving Fisher is one of the chief founders of the crude version of macroeconomics passed off as science by all variations of keynesians and neo-classicals, and even the nonsensical index-number is still used by Post-Keynesians such as Steve Keen.

I will update this.