As the Austrian explanation of the business cycle has gained adherents, the debunkers too want their voice heard. At the heart of Edmund Phelps's misrepresentation of Austrian business cycle theory is his capital theory and a lack of an appreciation for the important role of saving in the wealth creation process. Robert D. McTeer makes a similar error in his defense of Keynes's paradox of thrift.
Three years into one of the most severe bear markets in history, the most striking feature of the typical economic discussion is the persistent state of denial about how perilous our situation truly is. Also notable is the unthinking promulgation of a species of economic fallacies which, though long since discredited, keep springing up like weeds to choke our reasoning about where we might go from here and, therefore, of how we should be preparing to act. Let us take a look at a few of the more important reasons.
No one can argue about the current moribund economy, complete with flat or falling stock prices, nonexistent profits, layoffs, airline bankruptcies, and exploding federal and state budget deficits. But few people have accurately pointed out why there is no recovery from the original recession.
How are fiat money and the business cycle related? Without sound money, calculation is less efficient and the economy will be prone to business cycles. With sound money policy, no boom-bust cycle will emerge and monetary calculation and planning will be as efficient as possible in an uncertain world. John Cochran explains.
As the Washington Post recently reported, "The Federal Reserve Board has recently waged a vigorous campaign of defense, arguing that it was better to have boomed and busted than never to have boomed at all." Poetic perhaps, but is it sound?
Critics of Austrian theory maintain that there is no justification for the notion that businessmen should fall prey again and again to an artificial lowering of interest rates. Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates. Frank Shostak responds.
Given the economics of the cycle, writes Sean Corrigan, there are no easy choices. Standing the path of recovery are huge, perhaps unprecedented, imbalances, record indebtedness perched atop still-overblown asset prices, the ire of powerful vested interests, and a blind dedication to a whole pharmacopoeia of quack remedies and misdiagnoses.
The Federal Reserve System may have run out of room to maneuver. Facing a looming recession, it resolutely lowered its discount rate and frantically expanded its credits. Eager to stimulate the sagging economy, it enabled and encouraged businessmen to invest more and consumers to go ever deeper into debt. Yet the specter of recession refuses to fade away.
