(Victor Joecks/NPRI) – I just came across this article on the left-leaning Slate.com that purports to dispel the fallacies of Austrian economics. The article, called “What is ‘Austrian Economics’? And why is Ron Paul obsessed with it?” might be more convincing if it was clear that the author, Matthew Yglesias, had even read a single Austrian textbook or was familiar with the major theories.
I’ve noted some of the most glaring faults with the author’s narrative:
1. Hayek won the Nobel Prize for his explanation of monetary policy’s relation to the business cycle, not because of the recognition that prices convey information.
2. Both Rothbard and Hayek’s versions of the business cycle theory draw careful distinctions between shifts in consumer preference and the sudden collapse of demand across many sectors.
3. The Great Depression didn’t disprove Austrian business cycle theory – it gave it renewed credibility. Rothbard and Lionel Robbins’ books on the Great Depression are two of the best known Austrian works. Prior to the 1913, the only artificial credit expansion was due to fractional reserve banking. The recession of 1921 and the Depression were the first to add a new layer – artificial credit produced by the Fed.
4. Finally – and most importantly – the Austrians never assert that a bust is the inevitable result of a boom.
They hold that booms are permanently sustainable so long as the capital structure is financed through genuine savings. It’s the expansion of artificial credit that creates calculation problems by disassociating interest rates from savings rates.
Come to think of it, I seem to recall explaining that in a recent R-J editorial. Perhaps Yglesias should have given me a call before embarrasing himself on the internet!
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