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Mises and Hayek at Columbia and the Bank of International Settlements


Peter Boettke at Coordination Problem highlighted a paper by Guillermo Calvo of Columbia University, “Puzzling Over the Anatomy of Crises: Liquidity and the Veil of Finance,” which is very sympathetic to the contributions of Mises and Hayek . Calvo goes so far as to argue, “the Austrian school of the trade cycle was on the right track.”

One of Calvo’s references, Claudio Borio (2012 ) “The financial cycle and macroeconomics: What have we learnt?” (Bank of International Settlements Working Paper No 395 Dec 2012) should also be of interest.

The strengths of both papers from an Austrian perspective, other than the papers certainly belie the claim by critics that ABCT has nothing to add to modern macro, are three:

  1. The papers argue recent empirical evidence, contra Freidman plucking, supports the Austrian view of a boom triggering a bust. Per Calvo, “There is a growing empirical literature purporting to show that financial crises are preceded by credit booms (Mendoza and Terrones (2008), Schularik and Taylor (2012), Agosin and Huaita (2012), Borio (2012)). Adding “This was a central theme in the Austrian School of Economics (see Hayek (2008), Mises (1952)).
  2. In a growing economy such as the 1920s and the 1990s and 2000s in the U.S., a monetary regime focusing on near term inflation, price, or even nominal GDP stability would still be subject to boom-bust cycles (Hayek and the 21st Century Boom-Bust and Recession-Recovery). Per Borio, A “major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening.”
  3. Calvo and Borio recognize, as do Hayek, Mises, and modern Austrians (Rethinking Capital-Based Macroeconomics) that expansionary monetary policy during the recession phase may actually impede recovery and/or trigger renewed mis-directions of production setting the stage for a future more destructive bust a la the “unfinished” 2000 recession and the destructive 07-08 bust.

Major Weakness:


  1. Both papers focus on a credit cycle not on created credit and thus fail to recognize the necessary role of central banking in turning small bubbles into big bubbles and economy-wide booms.
  2. This focus on credit as a market phenomenon can lead to really bad policy options such as “macroprudential” policy.

Some of Calvo’s liquidity consideration should prompt a re-read of Block and Barnett on term structure intermediation.

For further discussion see Tyler Cowen here or Peter Boettke here.

William R. White is another economist who has worked at the Bank of International Settlements (BIS) and has been influenced by Hayek. See his “Should Monetary Policy Lean or Clean?” in Boom and Bust Banking The Causes and Cures of the Great Recession.

Neither paper makes an attempt to incorporate the imporant capital-structure issues.

John P. Cochran (1949-2015) was emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He was also a senior fellow of the Mises Institute and served on the editorial board of the Quarterly Journal of Austrian Economics.

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