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Have the Austrians abandoned capital-theory?

Discussion in 'Business & Economics' started by Onion Eater, Oct 12, 2008.

  1. Onion Eater

    Onion Eater Member

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    Roger Garrison (2001, p. 33) writes:

    “Macroeconomics in the Austrian tradition owes its uniqueness to the Austrian capital theory on which it is based.”

    Judith Thommesen, Managing Editor of the Quarterly Journal of Austrian Economics, writes:

    "The author grossly errs in equating the Austrian tradition itself with capital theory, thus ignoring the core of Austrian economics: praxeological price theory. The author further spends an inordinate amount of time parsing details regarding which direction capital structure triangles lie and which way arrows on diagrams point. Although these may be important regarding pedagogy, they hardly define who gets the theory right and who gets it wrong."

    The QJAE does not publish papers about capital theory? How much things have changed since Fall 2001 when they devoted an entire issue to apotheosizing the author of a book titled The Macroeconomics of Capital Structure! I will defend my “gross error” by quoting from the dust jacket of her master’s 2001 book:

    “Roger W. Garrison claims that modern Austrian macroeconomics, which builds on the early writings of F. A. Hayek, can be comprehended as an effort to reinstate the capital-theory core that allows for a real coupling of short- and long-run perspectives.... This volume [Time and Money: The Macroeconomics of Capital Structure] puts forth a persuasive argument that the troubles that characterize modern capital-intensive economies, particularly the episodes of boom and bust, may best be analyzed with the aid of a capital-based macroeconomics.”

    My question for House of Politics discussants:

    Have the Austrians abandoned their capital-theory core, built on the early writings of F. A. Hayek? If so, then why does Roger Garrison have Hayek's triangle displayed so prominently on his website?

    And, most importantly, did the Economics Troll win?

    REFERENCES

    Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge
     
  2. Onion Eater

    Onion Eater Member

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    Roger Garrison (2001, Chapter One) writes:

    "Some members of the [Austrian] school have long turned a blind eye to the issues of business cycles and to macroeconomics more broadly conceived. Classics in Austrian Economics: A Sampling in the History of a Tradition, edited by Israel Kirzner (1994), gives little or no hint that the Austrian economists ever asked a macroeconomic question… Similarly, Nicolai Foss' Austrian School of Modern Economics: Essays in Reassessment (1994) gives no clue of the existence of a modern Austrian macroeconomics. Karen Vaughn's Austrian Economics in America: The Migration of a Tradition (1994) leaves the impression that macroeconomics never reached - or possibly shouldn't have reached - the American shore. And in her recent reflections on the development of the Austrian tradition (1999), she hints that progress is to be measured in part by the school's distancing itself from the issues associated with the business cycle."

    Clearly, Kirzner (1994), Foss (1994) and Vaughn (1994) find Austrian Business Cycle Theory indefensible and have attempted to distance themselves from it.

    Garrison believes that the theory of Hayek and Rothbard can be salvaged and has added a new innovation, attaching Hayek's triangle to the Production Possibilities Frontier, PPF, in an attempt do just that. Garrison is, in fact, so proud of this new innovation that he displays it prominently on the home page of his website.

    I criticize this innovation:

    “Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency."

    A quick trip to the dictionary should clear things up:

    Production Possibility Frontier, PPF: This curve shows the possibilities open for increasing the output of one good by reducing the output of another... Note that any points outside the frontier are unobtainable.

    Source: MIT Dictionary of Modern Economics

    No economist believes that "unobtainable" and "unsustainable" are the same thing - Garrison has pulled the ol' switcheroo on us! So what does "unsustainable" mean in Garrison's lexicon? Nobody knows. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency. He has (apparently inadvertently) defined away the only real problem that credit expansions face: inflation.

    Even his own comrades were left befuddled by this language. Jörg Guido Hülsmann writes:

    "The first thing to notice is that Garrison (pp. 44 and 70) employs a rather idiosyncratic definition of the PPF. In his eyes, the 'PPF represents sustainable combinations of consumption and investment.' Thus the PPF is not a choice-independent physical limitation of human action, but a permeable frontier, which in economic booms can be transgressed at least for short periods, albeit at the price of necessary busts at some later point of time. This unusual use of language is likely to spur misunderstandings and misinterpretations... It is one thing to draw a curve and say that it represents a limit for sustainable combinations of alternative production processes. It is another thing to explain why combinations are sustainable or unsustainable."

    Indeed. Another thing entirely.

    My question stands:

    Have the Austrians abandoned capital theory?

    Did Garrison salvage Hayek's theory with his new innovation or were Kirzner, Foss and Vaughn right to abandon Hayek?

    REFERENCES

    Foss, Nicolai. 1994. The Austrian School of Modern Economics: Essays in Reassessment. Copenhagen, Netherlands: Handelshojskolens

    Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge

    Kirzner, Israel (editor). 1994. Classics in Austrian Economics: A Sampling in the History of a Tradition. London, England: William Pickering

    Vaughn, Karen. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge, England: Cambridge University Press
     

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