To quote Woods,

“The pool of real savings turns out to be smaller than entrepreneurs anticipated, and thus the complementary factors of production they need wind up being scarcer than they expected. The prices for these parts, labor, and other resources will therefore be higher than entrepreneurs expected, and business costs will rise. Firms will need to borrow more to finance these unanticipated increases in input prices. This increased demand for borrowing will raise the interest rate. Reality now begins to set in….”

Did the “prices for these parts, labor, and other resources” rise “higher than entrepreneurs expected” and cause a financial (or economic) collapse? Is that what happened? Or is there another explanation that doesn’t need to invoke that theory, viz., that a house of cards collapsed when it turned out that the mortgages on which so much valuation was based were, in fact, less valuable than people had been led to believe, with the results we’ve seen?

If the latter, why invoke the canonical ABCT as Woods does? What value does it serve? It won’t do to say that some other version of a theory, that is an elaboration of the theory that Woods cites, can be or has been adjusted so that it can take account of the investments in housing. Ok. Fine. Did we see a collapse that emanated from the housing construction industry, because “prices for these parts, labor, and other resources” rose “higher than entrepreneurs expected”? If not, then the Woods account does not add to our knowledge, but describes something that didn’t happen.

“I don’t think that there’s much evidence that that happened. We got a lot of cheap easy credit thrown at us and we used it to buy cool consumer goods, including bigger and more expensive houses. We didn’t use the bigness of the houses to produce other goods; we just consumed it.”

I think that the portion of your response which I quoted above reveals that you possess a very fundamental misunderstanding of the ABCT. The claim that “we just consumed [the goods which we bought via the extra credit]” does not, in any way, invalidate or weaken the claim that the ABCT applies to our current/previous business cycle.

The ABCT says that an event X occurs which systematically causes the producers to lengthen their processes of production but does not also systematically cause the consumers to decrease their time preference. In other words, the producers begin to produce goods which will become available further in the future whereas the consumers continue to consume goods which exist closer in the future.

Therefore, if we did indeed “just consume[] [the goods which we bought via the extra credit]“, such action was consistent with the ABCT.

Steve, I certainly did not intend to be condescending to Roger Garrison, who’s a fine man. I was referring to the citation by Woods of a powerpoint on a faculty website as what everyone should have seen. My intention was not to dismiss Roger Garrison, but to refer to the Woods defense, which links to a powerpoint presentation that’s not mentioned in his book. That’s what’s relevant here — it’s not the case that’s made in the Woods book. There he just gives us old-time religion. If someone somewhere else made a different case, fine, but I was comparing two books, one of which is sophisticated and one of which is religious, not two theories.

So, did we see a price bubble, with a lot of bad mortgages that went sour and led to a financial collapse, or did we see the scenario that Woods outlines in his book for the “classical” (if you will) business cycle theory advanced in the 1930s? Woods offered us a rehashing of a theory that doesn’t seem to describe what happened. If someone else updated the theories he cites or added some improvements or epicycles, fine. But what I found in the Woods book was (on this issue) mainly religion, and not any updated or revised version. As I noted, it was ok on the tinkering in the mortgage markets, but not very sophisticated when compared to Norberg’s better treatment. Why would someone get his knickers so knotted up over that?

It’s ironic Tom that you would refer to (some? many? all?) Austrians as “religious” and concerned only with “studying” Austrian economics and then find yourself being, rightly in my view, criticized for an outdated, “fundamentalist” understanding of the theory. The point that all sides within AE are making in this debate is that Austrian economics is NOT a dead set of ideas from the 30s to be “studied” but rather a set that has evolved and been improved upon on the decades since. Thus the theory as you understand it and the theory as it has come to be understood are different, thanks mostly to new scholarship and applications in the last 20 or 30 years.

The very thing you are being criticized for is evidence that your charge of “religious” belief and AE just being “studied” is misguided.

Finally, your condescension toward Roger Garrison’s contributions is further evidence of your unwillingness to see this point. Roger’s powerpoints are great and all, but the man HAS written a Routledge book on Austrian cycle theory not to mention a number of refereed journal articles (and NOT just in Austrian outlets – see his 2004 HOPE paper on overconsumption for example). To dismiss his work as a mere powerpoint is ignorant and condescending and rude. You might think he’s a nice man and all, but it would be a lot more fair to give his work its due.

I’m agnostic on whether this or that theory best explains the crisis (like, on a lot of things). Is that what you’re saying, too? You don’ have the faith?

I’ll have to check Norberg’s book out, though. I thought “In Defense Of Global Capitalism” was excellent.

Kinsella took down his frankly weird rant, in which he said we shouldn’t read economists whose policy conclusions are objectionable (Palmer said he looked forward to reading “The Bottom Billion” by economist Paul Collier, which made Kinsella angry) and called Palmer a “pinhead” and a “sellout” and other names. Circle those wagons, guys! And get anyone who says your book is just “ok” fired from his job! That’ll show him what scholars we are. Yeah. That’ll show ‘em!

You’ve got guts to criticize the crazies, Tom. I think too many people shy away from this kind of reaction. Too much trouble.

Otherwise these are just insincere rhetorical questions.

I might also recommend the work of John Taylor.

It’s sad to see smart people devote themselves to defending a theory, rather than trying to figure out the world. When Mises wrote the Theory of Money and Credit in 1912, he was trying to understand new developments in institutions. But his followers merely try to understand him. That’s the difference between scholarship and religion. It’s a disservice to great minds when the results of their investigations and thinking, debates and discussions, are treated as texts to be pored over for the truth, rather than as spurs to further investigation, thought, debate, and discussion.

Also, I think that Tom Palmer, you shouldn’t be so religious as to disregard ideas that you don’t understand, or have insufficient understanding of, out of hand.

This “religion” thing is an empty canard Tom, and not worthy of you.

Where is the dogma, cult, church? The use of these terms is quite distasteful.

The Norberg book may well be a fine book. The critiques I have read about your post have been about your misunderstanding of the business cycle theory, including by Dr. Horwitz and Dr. Rizzo.

“People who just assert that every economic cycle must be explainable by one theory, with one model, are not doing economic science. They’re chanting mantras.”

And note well Tom, it’s your picture of the ABCT which is the thing that is fatally constricted. All Hayek was saying is that interest rates and profits will re-align the real structure and relative price of heterogeneous production processes and consumption and heterogeneous labor over time. No where did Hayek say that these relations couldn’t be quite different in different historical episodes — in fact, Hayek said exactly the opposite.

In real time BIS chief economists William White used Hayekian macro and the data on housing, derivatives, balance of payments, interest rates, etc. to lay out the case for an unsustainable Hayekian boom and inevitable bust — work White began publishing as early as 2003. Greenspan wouldn’t even look White in the eye when White explain what was happening to the world’s central bankers at a conference in 2003. White use more that just Hayekian macro to explain what was happening and what was going to happen, but Hayek’s macro was at the center of it all. I recommend White’s work to you, which is linked below:

http://hayekcenter.org/?p=1688

http://hayekcenter.org/?p=444

You write:

“Thanks for the citation. I have my copy of “The Pure Theory of Capital” before me (plus “Monetary Theory and the Trade Cycle” and “Profits, Interest and Investment”), which I’ve not looked at in many years. (The former I never got entirely through, in any case.) Could you please provide page numbers? (The indexes are sparse.)”

Bryan Caplan’s critique of the ABCT is that it is durable goods which suffer in a recession, regardless of whether they are “capital” used for later stages of production.