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View Full Version : Anti-Austrian Article - Someone sent me this link looking for rebuttals




ronpaulhawaii
05-18-2009, 06:14 AM
Here is his post


http://www.infoshop.org/faq/secC8.html : a series of objections to the Austrian theory of the business cycle from an anarchist (that is, anti-Marxist anarcho-socialist in the vein of Bakunin and Proudhon) website; thought you might find it of interest. I considered myself an ABCT proponent, before reading this; but now, I don't think I even know of rebuttals to any of these points. The ABCT is criticized from every possible angle; its premises are shown to be faulty, and in some instances even inconsistent with Austrianism; and even the claim that free banking or 100% gold reserve requirements would solve the problem of over-extention of credit (assuming that to actually be the cause of the boom-bust cycle) is dismantled. Do we have rebuttals to these criticisms or are they really as devastating as they seem to me to be?


Could someone please look it over and offer some rebuttals, it is too much for me to wrap my head around, at this time.

Thanks

Bern
05-18-2009, 06:45 AM
You might try asking the folks at mises.org. I don't have time to read it, much less analyze it.

Brassmouth
05-19-2009, 12:32 AM
Disclaimer: Have not read the entire piece. I skimmed it and read the last few paragraphs.


To sum up, "[i]t is not credit but only the increase in production made possible by it that increases surplus value. It is then the rate of exploitation which determines credit expansion." [Paul Mattick, Economics, Politics and the Age of Inflation, p. 18] Hence credit money would increase and decrease in line with capitalist profitability, as predicted in capitalist economic theory. But this could not affect the business cycle, which has its roots in production for capital (i.e. profit) and capitalist authority relations, to which the credit supply would obviously reflect, and not vice versa.

Marxian critique FTL. This is standard stuff straight out of Capital, which has been demolished by the Austrians countless times.

Without even having to read it, we laymen and students of economics can deduce that it isn't worth analyzing. If it was, the Austrian academic community would have jumped on it, ages ago. They're not in the habit of letting credible attacks on Austrian theory go unpunished.

Conza88
05-19-2009, 01:51 AM
http://mises.org/Community/forums/t/7941.aspx

Aakron
05-19-2009, 05:48 AM
Economist R. F. Kahn recounted when Hayek presented his theory at a seminar in Cambridge University. His presentation was followed by silence. Then Kahn asked the obvious question: "Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?"

That is a trick question, because it depends on where the money is obtained. If someone purchases a coat at the expense of another person not purchasing a coat, then that does nothing for employment. A rich banker could buy a $1,000 coat, or a rich banker could loan $200 to five people each to buy five coats. Either way, $1,000 worth of jobs are being generated. Any time something is purchased on borrowed money it on average creates zero more jobs in an economy than would otherwise exist, unless that money is re-invested as capital.

Spending earned money does increase employment. However, in a depression, increased unemployment is a symptom of a problem, not the problem itself. Therefore increasing employment reduces the symptom while making the root cause of our depression even worse because the person spending the money will have less money in their savings account after the purchase. Also, that employment today comes at the price of unemployment down the road. The coat is made today instead of a few years down the road. And while there is time value to a coat now vs. a few years down the road there is also a time value to that savings they could earn interest on if they did not buy the coat.


The notion that reducing consumption in a depression was the best thing to do convinced few people and the impact of such saving should be obvious, namely a collapse in demand for goods and services. Any savings would, in the circumstances of a recession, be unlikely to be used for investing.

First of all their could be different causes to a depression. If a depression is caused by excessive spending and therefore excessive demand like the one we are in now, a collapse in demand is exactly what is needed to get out of the depression.

Capital investing is not needed in a depression. Why invest in production when there is excessive production? That makes no sense. Savings is the solution in today's depression because that savings increases purchasing power. Increased savings increases not only increases a persons ability to buy things. Increased savings increases purchasing power, but additional spending reduces purchasing power. In a depression where the lack of purchasing power is the end problem, the end solution is to rebuild the purchasing power by saving money.

A collapse in demand is good because the demand goes down to sustainable levels which don't result in a decreased purchasing power (savings). Without the required collapse in demand the economy could theoretically be in the toilet forever.


After all, which company would start increasing its capital stock facing a fall in demand and which capitalist would venture to create a new company during a depression? Unsurprisingly, few economists thought that advocating a deflationary policy in the midst of the most severe economic crisis in history made much sense. It may have been economic orthodoxy but making the depression worse in order to make things better would have ensured either the victory of fascism or some-sort of socialist revolution.

New companies and additional stock don't need to be created as much during depressions and doing so can worsen the problem. Since a root problem is excessive demand, that will also lead to excessive production. Once the excessive demand is burned off, production needs to collapse to compensate. Only then does the depression end. After savings has returned for a while, demand will slowly return. When demand finally returns then the economy will be getting back on track, the economy will have leveled out, and those with savings will benefit by creating new companies. Reduced production and less companies being created reduces price deflation because you will have a fixed supply of money demanding a reduced supply of goods.

All I've said is why Ron Paul as an austrian economics expert has stated we will have a 15 year depression. It will take us 15 years to get to a point where we have purchasing power again. And of course purchasing power goes hand in hand with investing power.

brandon
05-19-2009, 06:02 AM
Here is the index for the entire thing.


An anarchist faq (http://www.infoshop.org/faq/index.html)

It's excruciatingly long. It's essentially a guide about being a "communist anarchist." I read a few pages and I want to go punch the author in the head. Being that's in only 8 in the morning I think I'm going to go take a walk and relax instead of continuing to read this garbage.

brandon
05-19-2009, 06:04 AM
Without even having to read it, we laymen and students of economics can deduce that it isn't worth analyzing. If it was, the Austrian academic community would have jumped on it, ages ago. They're not in the habit of letting credible attacks on Austrian theory go unpunished.

Off topic, but it took them years to rebut Aguilar's critique on Austrian economics, and they didn't do a very thorough job. Aguilar quickly responded to the "rebuttal" and they just ignored it.

ronpaulhawaii
05-19-2009, 06:08 AM
You guys rock :)

Thanks, this'll get our friend started


Here is the index for the entire thing.


An anarchist faq (http://www.infoshop.org/faq/index.html)

It's excruciatingly long. It's essentially a guide about being a "communist anarchist." I read a few pages and I want to go punch the author in the head. Being that's in only 8 in the morning I think I'm going to go take a walk and relax instead of continuing to read this garbage.

:eek: - LOL - :D

Aakron
05-19-2009, 06:15 AM
Yet the government does not force banks to make excessive loans and this is the first, and most obvious, fallacy of argument. After all, what Reekie is actually complaining about when he argues that "state action" creates the business cycle by creating excess money is that the state allows bankers to meet the demand for credit by creating it.

The credit is not exactly created so much as it is stolen. The purchasing power of the remaining money supply is decreased by exactly the value of the "created" credit. For example, if if the government prints up $10 trillion, then the value taken away from the remaining money supply holders is exactly $10 trillion at the time the printing took place. The only way to honestly increase the amount of credit is to create something of value such as a freshly mined silver, and loan based on that new creation.

Also, austrian economists certainly don't claim banks are forced into making excessive loans. However, they are most certainly enabled into making excessive loans under the current government system. The article attacks a straw man argument there when it says austrians believe banks are forced to make excessive loans. Right now banks are leveraged 25 times in the USA and if the federal government did not enable them to do that under a system where money is honest, then that excessive leverage would likely not be there.

Epic
05-19-2009, 06:39 AM
ABCT is hard fact, it's just logical.

Extra money pumped into economy --> flows into certain businesses ---> Owners of businesses say wow, we're doing awesome! so they expand ---> Oops that was a mistake because the profits that the expansion was based upon were not market-based, they were temporary money-supply based --> so now the malinvestment must be liquidated...

alternatively i like to think about it like this:

when new money and credit is created, the percentage of the money supply that I hold will decrease. But I don't know by how much. Hence, I'm left clueless as to how much money I actually have because I don't know what percentage of the money supply I have (which is generally judged by looking around at prices). So when I don't know what percentage of the money supply I control, I'm going to make crazy/wrong decisions (i.e. spending too much and expanding a business)



Another great short explanation here:
http://oneminute.rationalmind.net/business_cycles/

Brassmouth
05-19-2009, 09:54 AM
Off topic, but it took them years to rebut Aguilar's critique on Austrian economics, and they didn't do a very thorough job. Aguilar quickly responded to the "rebuttal" and they just ignored it.

I stand by my original statement.

TheEvilDetector
05-19-2009, 10:10 AM
Here is his post



Could someone please look it over and offer some rebuttals, it is too much for me to wrap my head around, at this time.

Thanks

"The second option, namely imposing a 100% gold reserve limit for banks is highly interventionist and so not remotely laissez-faire (why should the banking industry be subject to state regulation unlike the rest?). Its logic is simple, namely to ensure that banks do not make loans unless they have sufficient savings to cover them all. In other words, it seeks to abolish the credit cycle by abolishing credit by making banks keep 100% gold reserves against notes. This, in effect, abolishes banking as an industry. Simply put (and it seems strange to have to point this out to supporters of capitalism) banks seek to make a profit and do so by providing credit. This means that any capitalist system will be, fundamentally, one with credit money as banks will always seek to make a profit on the spread between loan and deposit rates. It is a necessity for the banking system and so non-fractional banking is simply not possible. The requirement that banks have enough cash on hand to meet all depositors demand amounts to the assertion that banks do not lend any money. A 100% reserve system is not a reformed or true banking system. It is the abolition of the banking system. Without fractional reserves, banks cannot make any loans of any kind as they would not be in a position to give their clients their savings if they have made loans. Only someone completely ignorant of a real capitalist economy could make such a suggestion and, unsurprisingly, this position is held by members of the "Austrian" school (particularly its minimum state wing). "

Above is a paragraph from the link provided in OP that seems to completely ignore the possibility of Term Deposits (deposits at a certain favourable interest rate which the depositor agrees not to withdraw from for a period of time) and therefore is on a flawed foundation. The bolded sections I do not agree with for the aforementioned reason.

Stary Hickory
05-19-2009, 11:35 AM
Fractional reserve banking is fraud. Fraud is illegal, requiring 100% reserves is merely protecting property rights. It's not intervention in the free market it is enabling the free market to function. WIthout property rights there is no free market.

hugolp
05-19-2009, 11:47 AM
Fractional reserve banking is fraud. Fraud is illegal, requiring 100% reserves is merely protecting property rights. It's not intervention in the free market it is enabling the free market to function. WIthout property rights there is no free market.

I know, people go on to say that laverage is really bad and caused the crisis and when you tell them thats an interventionist issue, that the free-market does not allow for any kind of piramization of debt they look at you like if you are crazy, and say that its not posible.

Aakron
05-19-2009, 07:13 PM
Thus the over supply of credit, rather than being the cause of the crisis is actually a symptom. Competitive investment drives the business cycle expansion, which is allowed and encouraged by the competition among banks in supplying credit.

While over-supply of credit may indeed be a symptom of a problem, credit is a tool that enables businesses to properly expand as well as over-expand. Credit is nearly unlimited under fiat systems, so over-expansion is far easier under fiat money systems when compared to commodity-reserve money systems. Also, the line of reasoning to arrive at their conclusion is something I failed to see.

Aakron
05-19-2009, 08:21 PM
Hence, according to the argument, by eliminating state control of money these [overproduction] negative effects of capitalism would disappear as the credit system, if working correctly, will communicate all the relevant information required by capitalists.

This analysis, however, is flawed. We have noted one flaw above, namely the problem that interest rates do not provide sufficient or correct information for investment decisions.

The article seems to paint austrian economists as believing corporations use the interest rate to determine whether or not their investment will pay off. Not true, a corporation first calculates how much they believe they can profit from a given investment, and then checks what the interest rate is on a loan for that investment to see if it is at a profitable point. The lower the interest rate is, the less likely they are to achieve a profit. The higher the rate, the higher the risk. So no, that is not a valid point, because austrian economists don't claim the primary purpose of interest rates is to provide information regarding predictions about the future to businesses. The purpose of interest rates is to generate a profit for the person making the loan. The article is raising an irrelevant issue and then counts it against austrian economics. And I admit an austrian economist brought up the "information" topic first but frankly he shouldn't have.


The expansion and contraction of credit is a mere symptom of the periodic changes in the business cycle, as the decline of profitability contracts credit just as an increase enlarges it.

Yes, the expansion/contraction of credit is a symptom of change in a business cycle just as the article states. In fact credit itself is not a problem to an austrian economists, who do actually like the idea of credit being available. However, credit does represent potential for a problem. And excessive credit can be itself a cause of a problem and a cause of a deeper cycle. Under 100% backed money systems the potential is projected to be small, whereas under fiat systems the potential is well proven to be enormous.

Austrian economists believe that the benefits of credit outweighs the risk of the business cycle. The article itself includes a quote "...as a result of the finance banks were able to place at the disposal of producers, the real income of Scotland doubled or trebled in a remarkably short time". So, the basic idea credit looks like it is a good idea. But at the same time Austrian economists believe nearly unlimited fiat money creates nearly unlimited risk in the form of periodic economic depressions that can go on for as long as the excessive credit flows.