Edmund Phelps of Columbia University writing in the WSJ (June 3, 2003) critiques the Austrian (Mises-Hayek) theory of the business cycle with no reference at all to the central-bank induced artificiality of the boom phase, which is the very core of the theory:
From an LRC blog by Daniel McCarthy:
I’m spending the summer as a research fellow at the Ludwig von Mises Institute. One of the perks of this role is having access to copies of the institute’s various publications -- including the Mises Review.
Bill Jamieson writing in The Scotsman proposes 0.0% interest rates, and says: “For a generation of economists and commentators driven by the inflationary crisis of the 1970s into the arms of the Austrian school of economics, this is high heresy. The prime role of central banks was the control of inflation and the very first step was the halting of the printing presses.
From Reuters via Forbes, Greenspan says:
Ramesh Ponnuru, writing on NRO’s Blog, says:
Not only does Mr. Phelps fail to address the “artificiality” of the boom faces, he blatantly mischaracterizes Austrian Business cylce theory as a theory of overinvestment. Everything I have read regarding Austrian theory explains how malinvestment occurs due to the distortion of the pricing/production process by excess creation of money and credit. Mises constantly cautions that this is not a theory of overinvestment, rather malinvestment.
After ninety years of work on the Austrian theory of the business cycle, and a shelf full of books and journal articles, it is rather alarming that Edmund Phelps could have gotten it so wrong. Greg Ransom at the Hayek Center draws attention to this aspect of the Phelps piece, calling it “a major embarassment for the editorial page of the Wall Street Journal.” He also runs the piece in its entirety.
“But economists don’t know accurately where the natural rate is, so how can the market?”
Posted by Ilana MercerThe major point in Austrian Business Cycle Theory (ABCT) that Phelps examines is that it is an overinvestment theory. In other words, the economy goes on a boom that causes an overinvestment in the capital structure, which then must collapse with the downturn. As his analysis goes, he paints a convincing argument if you allow a few assumptions. First, the ABCT is really a theory of only overinvestment. Second, capital is homogeneous and evenly distributed through the boom.
